What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Weihai Guangwei Composites (SZSE:300699) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Weihai Guangwei Composites, this is the formula:

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

0.14 = CN¥765m ÷ (CN¥6.4b - CN¥815m) (Based on the trailing twelve months to June 2023).

So, Weihai Guangwei Composites has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Chemicals industry.

See our latest analysis for Weihai Guangwei Composites

In the above chart we have measured Weihai Guangwei Composites' 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 Weihai Guangwei Composites here for free.

How Are Returns Trending?

The trends we've noticed at Weihai Guangwei Composites are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 89% more capital is being employed now too. So we're very much inspired by what we're seeing at Weihai Guangwei Composites thanks to its ability to profitably reinvest capital.

Our Take On Weihai Guangwei Composites' ROCE

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 Weihai Guangwei Composites has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 86% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Weihai Guangwei Composites does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Weihai Guangwei Composites 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.