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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So, when we ran our eye over Jiangxi Hongcheng EnvironmentLtd's (SHSE:600461) trend of ROCE, we liked what we saw.

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

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 Jiangxi Hongcheng EnvironmentLtd, this is the formula:

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

0.12 = CN¥1.8b ÷ (CN¥24b - CN¥8.4b) (Based on the trailing twelve months to March 2024).

Thus, Jiangxi Hongcheng EnvironmentLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Water Utilities industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Hongcheng EnvironmentLtd's ROCE against it's prior returns. If you're interested in investigating Jiangxi Hongcheng EnvironmentLtd's past further, check out this free graph covering Jiangxi Hongcheng EnvironmentLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 148% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Jiangxi Hongcheng EnvironmentLtd has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 154% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Jiangxi Hongcheng EnvironmentLtd does have some risks though, and we've spotted 3 warning signs for Jiangxi Hongcheng EnvironmentLtd that you might be interested in.

While Jiangxi Hongcheng EnvironmentLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.