What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. And in light of that, the trends we're seeing at Shanghai Chicmax Cosmetic's (HKG:2145) look very promising so lets take a look.

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. The formula for this calculation on Shanghai Chicmax Cosmetic is:

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

0.20 = CN¥425m ÷ (CN¥3.1b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

Thus, Shanghai Chicmax Cosmetic has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 12%.

In the above chart we have measured Shanghai Chicmax Cosmetic'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 Shanghai Chicmax Cosmetic .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Shanghai Chicmax Cosmetic. The data shows that returns on capital have increased substantially over the last four years to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,996% more capital is being employed now too. So we're very much inspired by what we're seeing at Shanghai Chicmax Cosmetic thanks to its ability to profitably reinvest capital.

One more thing to note, Shanghai Chicmax Cosmetic has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

All in all, it's terrific to see that Shanghai Chicmax Cosmetic is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 121% to shareholders over the last year, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Shanghai Chicmax Cosmetic looks impressive, no company is worth an infinite price. The intrinsic value infographic for 2145 helps visualize whether it is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.