What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Yantai Zhenghai Magnetic Material's (SZSE:300224) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Yantai Zhenghai Magnetic Material, this is the formula:

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

0.064 = CN¥335m ÷ (CN¥8.0b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Thus, Yantai Zhenghai Magnetic Material has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

Above you can see how the current ROCE for Yantai Zhenghai Magnetic Material 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 Yantai Zhenghai Magnetic Material .

What Does the ROCE Trend For Yantai Zhenghai Magnetic Material Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 89%. So we're very much inspired by what we're seeing at Yantai Zhenghai Magnetic Material thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that Yantai Zhenghai Magnetic Material can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Yantai Zhenghai Magnetic Material, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Yantai Zhenghai Magnetic Material may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.