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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Tianqi Lithium's (SZSE:002466) look very promising so lets take a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tianqi Lithium, this is the formula:

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

0.37 = CN¥24b ÷ (CN¥70b - CN¥5.1b) (Based on the trailing twelve months to March 2024).

So, Tianqi Lithium has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.8%.

In the above chart we have measured Tianqi Lithium's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tianqi Lithium for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Tianqi Lithium are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 37%. The amount of capital employed has increased too, by 60%. So we're very much inspired by what we're seeing at Tianqi Lithium thanks to its ability to profitably reinvest capital.

Our Take On Tianqi Lithium's ROCE

To sum it up, Tianqi Lithium has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 81% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Tianqi Lithium that you might find interesting.

Tianqi Lithium 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.