What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Ergo, when we looked at the ROCE trends at Jiangsu Yanghe Brewery (SZSE:002304), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Jiangsu Yanghe Brewery:

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

0.25 = CN¥13b ÷ (CN¥64b - CN¥12b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Yanghe Brewery has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Beverage industry average of 12%.

Above you can see how the current ROCE for Jiangsu Yanghe Brewery compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Yanghe Brewery for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Jiangsu Yanghe Brewery. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 60% more capital into its operations. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Jiangsu Yanghe Brewery can keep this up, we'd be very optimistic about its future.

What We Can Learn From Jiangsu Yanghe Brewery's ROCE

In short, we'd argue Jiangsu Yanghe Brewery has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 0.8% over the last five years for shareholders who have owned the stock in this period. So to determine if Jiangsu Yanghe Brewery is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While Jiangsu Yanghe Brewery looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002304 helps visualize whether it is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.