If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 COFCO Capital Holdings (SZSE:002423) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for COFCO Capital Holdings, this is the formula:

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

0.028 = CN¥2.9b ÷ (CN¥145b - CN¥42b) (Based on the trailing twelve months to June 2024).

Therefore, COFCO Capital Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for COFCO Capital Holdings' ROCE against it's prior returns. If you're interested in investigating COFCO Capital Holdings' past further, check out this free graph covering COFCO Capital Holdings' past earnings, revenue and cash flow.

So How Is COFCO Capital Holdings' ROCE Trending?

On the surface, the trend of ROCE at COFCO Capital Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 3.9% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for COFCO Capital Holdings. And long term investors must be optimistic going forward because the stock has returned a huge 134% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing to note, we've identified 2 warning signs with COFCO Capital Holdings and understanding them should be part of your investment process.

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.