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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Wuxi Lead Intelligent EquipmentLTD's (SZSE:300450) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Wuxi Lead Intelligent EquipmentLTD:

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

0.25 = CN¥3.2b ÷ (CN¥33b - CN¥20b) (Based on the trailing twelve months to September 2023).

Therefore, Wuxi Lead Intelligent EquipmentLTD has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.

Check out our latest analysis for Wuxi Lead Intelligent EquipmentLTD

In the above chart we have measured Wuxi Lead Intelligent EquipmentLTD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wuxi Lead Intelligent EquipmentLTD.

The Trend Of ROCE

In terms of Wuxi Lead Intelligent EquipmentLTD's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 258% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Wuxi Lead Intelligent EquipmentLTD can keep this up, we'd be very optimistic about its future.

On a side note, Wuxi Lead Intelligent EquipmentLTD's current liabilities are still rather high at 61% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're delighted to see that Wuxi Lead Intelligent EquipmentLTD has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with Wuxi Lead Intelligent EquipmentLTD (at least 1 which can't be ignored) , and understanding them would certainly be useful.

Wuxi Lead Intelligent EquipmentLTD is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.