What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, the ROCE of Shanghai Yaoji Technology (SZSE:002605) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Shanghai Yaoji Technology, this is the formula:

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

0.17 = CN¥706m ÷ (CN¥5.3b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Shanghai Yaoji Technology has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Leisure industry average of 5.7% it's much better.

In the above chart we have measured Shanghai Yaoji Technology'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 Yaoji Technology .

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 112% in that time. 17% is a pretty standard return, and it provides some comfort knowing that Shanghai Yaoji Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

The main thing to remember is that Shanghai Yaoji Technology has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 125% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Shanghai Yaoji Technology does have some risks though, and we've spotted 1 warning sign for Shanghai Yaoji Technology that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.