If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Shanghai Huafon Aluminium (SHSE:601702) looks great, so lets see what the trend can tell us.

Understanding 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 Huafon Aluminium is:

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

0.23 = CN¥1.3b ÷ (CN¥7.6b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Huafon Aluminium has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

In the above chart we have measured Shanghai Huafon Aluminium'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 Huafon Aluminium .

The Trend Of ROCE

Investors would be pleased with what's happening at Shanghai Huafon Aluminium. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 252%. So we're very much inspired by what we're seeing at Shanghai Huafon Aluminium thanks to its ability to profitably reinvest capital.

One more thing to note, Shanghai Huafon Aluminium has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Shanghai Huafon Aluminium has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To sum it up, Shanghai Huafon Aluminium has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 50% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Shanghai Huafon Aluminium looks impressive, no company is worth an infinite price. The intrinsic value infographic for 601702 helps visualize whether it is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.