Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Kaili Catalyst & New MaterialsLtd's (SHSE:688269) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Kaili Catalyst & New MaterialsLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = CN¥216m ÷ (CN¥1.3b - CN¥305m) (Based on the trailing twelve months to June 2022).

Therefore, Kaili Catalyst & New MaterialsLtd has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.

See our latest analysis for Kaili Catalyst & New MaterialsLtd

Above you can see how the current ROCE for Kaili Catalyst & New MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Kaili Catalyst & New MaterialsLtd Tell Us?

We'd be pretty happy with returns on capital like Kaili Catalyst & New MaterialsLtd. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 504% in that time. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Kaili Catalyst & New MaterialsLtd has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Kaili Catalyst & New MaterialsLtd's ROCE

In short, we'd argue Kaili Catalyst & New MaterialsLtd has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last year, the stock has only delivered a 5.1% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know about the risks facing Kaili Catalyst & New MaterialsLtd, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.