If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, JH Educational Technology (HKG:1935) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for JH Educational Technology, this is the formula:

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

0.15 = CN¥365m ÷ (CN¥3.0b - CN¥554m) (Based on the trailing twelve months to December 2021).

Thus, JH Educational Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Consumer Services industry.

View our latest analysis for JH Educational Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for JH Educational Technology's ROCE against it's prior returns. If you'd like to look at how JH Educational Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at JH Educational Technology are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. 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 144%. 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.

The Bottom Line On JH Educational Technology's ROCE

All in all, it's terrific to see that JH Educational Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 121% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, JH Educational Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

While JH Educational Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.