If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Yangzhou Chenhua New Material's (SZSE:300610) returns on capital, so let's have a look.

What is 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. To calculate this metric for Yangzhou Chenhua New Material, this is the formula:

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

0.13 = CN¥148m ÷ (CN¥1.4b - CN¥232m) (Based on the trailing twelve months to March 2022).

Therefore, Yangzhou Chenhua New Material has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.9% it's much better.

Check out our latest analysis for Yangzhou Chenhua New Material

Above you can see how the current ROCE for Yangzhou Chenhua New Material 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 Yangzhou Chenhua New Material.

What Does the ROCE Trend For Yangzhou Chenhua New Material Tell Us?

We like the trends that we're seeing from Yangzhou Chenhua New Material. Over the last five years, returns on capital employed have risen substantially to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 79%. So we're very much inspired by what we're seeing at Yangzhou Chenhua New Material thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Yangzhou Chenhua New Material 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. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Yangzhou Chenhua New Material that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.