What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Zhejiang Cayi Vacuum Container (SZSE:301004) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Cayi Vacuum Container:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = CN¥466m ÷ (CN¥1.5b - CN¥392m) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Cayi Vacuum Container has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 7.7%.
View our latest analysis for Zhejiang Cayi Vacuum Container
Above you can see how the current ROCE for Zhejiang Cayi Vacuum Container compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Zhejiang Cayi Vacuum Container's returns on capital. Over the past five years, ROCE has remained relatively flat at around 41% and the business has deployed 399% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
Our Take On Zhejiang Cayi Vacuum Container's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 53% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you'd like to know more about Zhejiang Cayi Vacuum Container, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
Zhejiang Cayi Vacuum Container 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.