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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of Guangzhou Kingmed Diagnostics Group (SHSE:603882) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Guangzhou Kingmed Diagnostics Group:

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

0.40 = CN¥3.4b ÷ (CN¥14b - CN¥5.0b) (Based on the trailing twelve months to June 2022).

Thus, Guangzhou Kingmed Diagnostics Group has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 14%.

See our latest analysis for Guangzhou Kingmed Diagnostics Group

Above you can see how the current ROCE for Guangzhou Kingmed Diagnostics Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Kingmed Diagnostics Group here for free.

The Trend Of ROCE

We like the trends that we're seeing from Guangzhou Kingmed Diagnostics Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The amount of capital employed has increased too, by 317%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Guangzhou Kingmed Diagnostics Group's ROCE

In summary, it's great to see that Guangzhou Kingmed Diagnostics Group 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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 37% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Guangzhou Kingmed Diagnostics Group we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

Guangzhou Kingmed Diagnostics Group 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.