If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 looked at the ROCE trend of Anhui Guangxin Agrochemical (SHSE:603599) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Anhui Guangxin Agrochemical is:

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

0.29 = CN¥2.5b ÷ (CN¥12b - CN¥3.8b) (Based on the trailing twelve months to September 2022).

So, Anhui Guangxin Agrochemical has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 8.9%.

View our latest analysis for Anhui Guangxin Agrochemical

Above you can see how the current ROCE for Anhui Guangxin Agrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Anhui Guangxin Agrochemical.

How Are Returns Trending?

We like the trends that we're seeing from Anhui Guangxin Agrochemical. Over the last five years, returns on capital employed have risen substantially to 29%. The amount of capital employed has increased too, by 208%. So we're very much inspired by what we're seeing at Anhui Guangxin Agrochemical thanks to its ability to profitably reinvest capital.

The Bottom Line On Anhui Guangxin Agrochemical's ROCE

In summary, it's great to see that Anhui Guangxin Agrochemical can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 120% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Anhui Guangxin Agrochemical (including 1 which doesn't sit too well with us) .

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.