What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Qinghai Huzhu TianYouDe Highland Barley Spirit (SZSE:002646) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. To calculate this metric for Qinghai Huzhu TianYouDe Highland Barley Spirit, this is the formula:

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

0.03 = CN¥85m ÷ (CN¥3.3b - CN¥452m) (Based on the trailing twelve months to September 2024).

Thus, Qinghai Huzhu TianYouDe Highland Barley Spirit has an ROCE of 3.0%. 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 Qinghai Huzhu TianYouDe Highland Barley Spirit's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Qinghai Huzhu TianYouDe Highland Barley Spirit for free.

How Are Returns Trending?

There hasn't been much to report for Qinghai Huzhu TianYouDe Highland Barley Spirit's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Qinghai Huzhu TianYouDe Highland Barley Spirit doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Qinghai Huzhu TianYouDe Highland Barley Spirit has been paying out 133% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Our Take On Qinghai Huzhu TianYouDe Highland Barley Spirit's ROCE

In summary, Qinghai Huzhu TianYouDe Highland Barley Spirit isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 2 warning signs with Qinghai Huzhu TianYouDe Highland Barley Spirit (at least 1 which can't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.