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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Asia-potash International Investment (Guangzhou)Co.Ltd's (SZSE:000893) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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 Asia-potash International Investment (Guangzhou)Co.Ltd, this is the formula:

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

0.081 = CN¥1.2b ÷ (CN¥16b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

Thus, Asia-potash International Investment (Guangzhou)Co.Ltd has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

In the above chart we have measured Asia-potash International Investment (Guangzhou)Co.Ltd'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 Asia-potash International Investment (Guangzhou)Co.Ltd for free.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.1%. The amount of capital employed has increased too, by 270%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Asia-potash International Investment (Guangzhou)Co.Ltd's 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 Asia-potash International Investment (Guangzhou)Co.Ltd has. Since the stock has returned a staggering 136% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Asia-potash International Investment (Guangzhou)Co.Ltd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Asia-potash International Investment (Guangzhou)Co.Ltd 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.