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. With that in mind, we've noticed some promising trends at Asia-potash International Investment (Guangzhou)Co.Ltd (SZSE:000893) so let's look a bit deeper.
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. The formula for this calculation on Asia-potash International Investment (Guangzhou)Co.Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥1.7b ÷ (CN¥15b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
So, Asia-potash International Investment (Guangzhou)Co.Ltd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.6% it's much better.
View our latest analysis for Asia-potash International Investment (Guangzhou)Co.Ltd
In the above chart we have measured Asia-potash International Investment (Guangzhou)Co.Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Asia-potash International Investment (Guangzhou)Co.Ltd here for free.
So How Is Asia-potash International Investment (Guangzhou)Co.Ltd's ROCE Trending?
The fact that Asia-potash International Investment (Guangzhou)Co.Ltd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. Not only that, but the company is utilizing 563% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
Overall, Asia-potash International Investment (Guangzhou)Co.Ltd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 447% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Asia-potash International Investment (Guangzhou)Co.Ltd can keep these trends up, it could have a bright future ahead.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Asia-potash International Investment (Guangzhou)Co.Ltd (of which 1 is potentially serious!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.