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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Xinxiang Richful Lube AdditiveLtd (SZSE:300910) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for Xinxiang Richful Lube AdditiveLtd:

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

0.24 = CN¥726m ÷ (CN¥3.5b - CN¥423m) (Based on the trailing twelve months to September 2023).

So, Xinxiang Richful Lube AdditiveLtd has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.7%.

In the above chart we have measured Xinxiang Richful Lube AdditiveLtd'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 Xinxiang Richful Lube AdditiveLtd for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Xinxiang Richful Lube AdditiveLtd. The data shows that returns on capital have increased substantially over the last five years to 24%. The amount of capital employed has increased too, by 624%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Xinxiang Richful Lube AdditiveLtd's ROCE

To sum it up, Xinxiang Richful Lube AdditiveLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 29% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Xinxiang Richful Lube AdditiveLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

Xinxiang Richful Lube AdditiveLtd 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.