Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Lontrue's (SZSE:300175) returns on capital, so let's have a look.

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

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. The formula for this calculation on Lontrue is:

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

0.03 = CN¥16m ÷ (CN¥677m - CN¥157m) (Based on the trailing twelve months to September 2023).

So, Lontrue has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

Check out our latest analysis for Lontrue

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lontrue's ROCE against it's prior returns. If you're interested in investigating Lontrue's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Lontrue is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.0% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. Lontrue could be selling under-performing assets since the ROCE is improving.

The Key Takeaway

From what we've seen above, Lontrue has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Lontrue does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Lontrue 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.