Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at China Ruyi Holdings (HKG:136) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Ruyi Holdings:

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

0.16 = CN¥2.3b ÷ (CN¥19b - CN¥4.5b) (Based on the trailing twelve months to June 2024).

So, China Ruyi Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 9.7% it's much better.

Above you can see how the current ROCE for China Ruyi Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Ruyi Holdings .

What Does the ROCE Trend For China Ruyi Holdings Tell Us?

China Ruyi Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 1,176%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Ruyi Holdings has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 71% return over the last five years. In light of that, we think it's worth looking further into this stock because if China Ruyi Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we've found 3 warning signs for China Ruyi Holdings that we think you should be aware of.

While China Ruyi Holdings isn't earning the highest return, check out this free list of companies that are 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.