What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at China National Gold Group Gold JewelleryLtd's (SHSE:600916) ROCE trend, we were very happy with what we saw.

Understanding 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. The formula for this calculation on China National Gold Group Gold JewelleryLtd is:

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

0.20 = CN¥1.6b ÷ (CN¥14b - CN¥5.5b) (Based on the trailing twelve months to March 2024).

Therefore, China National Gold Group Gold JewelleryLtd has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.

Above you can see how the current ROCE for China National Gold Group Gold JewelleryLtd 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 China National Gold Group Gold JewelleryLtd .

What Can We Tell From China National Gold Group Gold JewelleryLtd's ROCE Trend?

It's hard not to be impressed by China National Gold Group Gold JewelleryLtd's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 83% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If China National Gold Group Gold JewelleryLtd can keep this up, we'd be very optimistic about its future.

Another thing to note, China National Gold Group Gold JewelleryLtd has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Yet over the last three years the stock has declined 34%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a separate note, we've found 1 warning sign for China National Gold Group Gold JewelleryLtd you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.

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