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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Kuaijishan Shaoxing Rice Wine (SHSE:601579) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Kuaijishan Shaoxing Rice Wine is:

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

0.055 = CN¥206m ÷ (CN¥4.3b - CN¥528m) (Based on the trailing twelve months to September 2024).

Therefore, Kuaijishan Shaoxing Rice Wine has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 18%.

In the above chart we have measured Kuaijishan Shaoxing Rice Wine'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 Kuaijishan Shaoxing Rice Wine .

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Kuaijishan Shaoxing Rice Wine's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Kuaijishan Shaoxing Rice Wine to be a multi-bagger going forward.

The Bottom Line On Kuaijishan Shaoxing Rice Wine's ROCE

In a nutshell, Kuaijishan Shaoxing Rice Wine has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 49% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Kuaijishan Shaoxing Rice Wine and understanding this should be part of your investment process.

While Kuaijishan Shaoxing Rice Wine 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.