To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Proya CosmeticsLtd's (SHSE:603605) returns on capital, so let's have a look.

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. To calculate this metric for Proya CosmeticsLtd, this is the formula:

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

0.29 = CN¥1.6b ÷ (CN¥7.4b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

Thus, Proya CosmeticsLtd has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 8.4%.

In the above chart we have measured Proya CosmeticsLtd'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 Proya CosmeticsLtd .

What Can We Tell From Proya CosmeticsLtd's ROCE Trend?

Proya CosmeticsLtd is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 191% more capital is being employed now too. So we're very much inspired by what we're seeing at Proya CosmeticsLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Proya CosmeticsLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Proya CosmeticsLtd can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Proya CosmeticsLtd and understanding it should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.