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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Qingdao Gaoce Technology's (SHSE:688556) ROCE trend, we were very happy with what we saw.

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. The formula for this calculation on Qingdao Gaoce Technology is:

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

0.37 = CN¥1.7b ÷ (CN¥9.5b - CN¥4.9b) (Based on the trailing twelve months to September 2023).

Therefore, Qingdao Gaoce Technology has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.4%.

Check out our latest analysis for Qingdao Gaoce Technology

In the above chart we have measured Qingdao Gaoce Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Qingdao Gaoce Technology.

The Trend Of ROCE

Qingdao Gaoce Technology deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 37% and the business has deployed 1,698% more capital into its operations. Now considering ROCE is an attractive 37%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Qingdao Gaoce Technology can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 51% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line On Qingdao Gaoce Technology's ROCE

Qingdao Gaoce Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 174% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 3 warning signs for Qingdao Gaoce Technology (1 makes us a bit uncomfortable) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.