What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. That's why when we briefly looked at Kweichow Moutai's (SHSE:600519) ROCE trend, we were very happy with what we saw.
Understanding 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. To calculate this metric for Kweichow Moutai, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = CN¥92b ÷ (CN¥242b - CN¥32b) (Based on the trailing twelve months to June 2023).
So, Kweichow Moutai has an ROCE of 44%. That's a fantastic return and not only that, it outpaces the average of 22% earned by companies in a similar industry.
View our latest analysis for Kweichow Moutai
In the above chart we have measured Kweichow Moutai'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 Kweichow Moutai.
How Are Returns Trending?
It's hard not to be impressed by Kweichow Moutai's returns on capital. Over the past five years, ROCE has remained relatively flat at around 44% and the business has deployed 117% 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. You'll see this when looking at well operated businesses or favorable business models.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From Kweichow Moutai's ROCE
In summary, we're delighted to see that Kweichow Moutai has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 182% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Kweichow Moutai does have some risks though, and we've spotted 1 warning sign for Kweichow Moutai that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.