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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhejiang Guyuelongshan Shaoxing WineLtd (SHSE:600059), it didn't seem to tick all of these boxes.

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 Zhejiang Guyuelongshan Shaoxing WineLtd:

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

0.035 = CN¥207m ÷ (CN¥6.8b - CN¥979m) (Based on the trailing twelve months to December 2023).

Therefore, Zhejiang Guyuelongshan Shaoxing WineLtd has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.

In the above chart we have measured Zhejiang Guyuelongshan Shaoxing WineLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Guyuelongshan Shaoxing WineLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Zhejiang Guyuelongshan Shaoxing WineLtd, we didn't gain much confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 3.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Zhejiang Guyuelongshan Shaoxing WineLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Guyuelongshan Shaoxing WineLtd. These trends are starting to be recognized by investors since the stock has delivered a 6.8% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang Guyuelongshan Shaoxing WineLtd (including 1 which can't be ignored) .

While Zhejiang Guyuelongshan Shaoxing WineLtd 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.