What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Jiangsu Huachang Chemical (SZSE:002274) looks quite promising in regards to its trends of return on capital.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Jiangsu Huachang Chemical:

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

0.13 = CN¥698m ÷ (CN¥7.9b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Huachang Chemical has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Chemicals industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Huachang Chemical.

What The Trend Of ROCE Can Tell Us

Jiangsu Huachang Chemical is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 74%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Jiangsu Huachang Chemical has decreased current liabilities to 32% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Jiangsu Huachang Chemical's ROCE

To sum it up, Jiangsu Huachang Chemical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Jiangsu Huachang Chemical does have some risks though, and we've spotted 1 warning sign for Jiangsu Huachang Chemical that you might be interested in.

While Jiangsu Huachang Chemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.