If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we're seeing at Shanxi Xinghuacun Fen Wine FactoryLtd's (SHSE:600809) look very promising so lets take a look.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanxi Xinghuacun Fen Wine FactoryLtd is:

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

0.43 = CN¥17b ÷ (CN¥56b - CN¥17b) (Based on the trailing twelve months to March 2025).

Therefore, Shanxi Xinghuacun Fen Wine FactoryLtd has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Beverage industry average of 13%.

In the above chart we have measured Shanxi Xinghuacun Fen Wine FactoryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanxi Xinghuacun Fen Wine FactoryLtd .

The Trend Of ROCE

Shanxi Xinghuacun Fen Wine FactoryLtd is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 43%. Basically the business is earning more per dollar of capital invested and in addition to that, 338% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In summary, it's great to see that Shanxi Xinghuacun Fen Wine FactoryLtd 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 stock has returned a staggering 145% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shanxi Xinghuacun Fen Wine FactoryLtd can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Shanxi Xinghuacun Fen Wine FactoryLtd you'll probably want to know about.

Shanxi Xinghuacun Fen Wine FactoryLtd 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.