What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Sichuan Teway Food GroupLtd (SHSE:603317) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sichuan Teway Food GroupLtd is:

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

0.11 = CN¥484m ÷ (CN¥5.4b - CN¥861m) (Based on the trailing twelve months to March 2024).

So, Sichuan Teway Food GroupLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

Above you can see how the current ROCE for Sichuan Teway Food GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sichuan Teway Food GroupLtd .

How Are Returns Trending?

In terms of Sichuan Teway Food GroupLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 24% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Sichuan Teway Food GroupLtd'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 Sichuan Teway Food GroupLtd. These growth trends haven't led to growth returns though, since the stock has fallen 41% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Sichuan Teway Food GroupLtd that you might find interesting.

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.