What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Qingdao East Steel Tower StockLtd (SZSE:002545) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Qingdao East Steel Tower StockLtd is:

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

0.069 = CN¥734m ÷ (CN¥13b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Therefore, Qingdao East Steel Tower StockLtd has an ROCE of 6.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

In the above chart we have measured Qingdao East Steel Tower StockLtd'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 Qingdao East Steel Tower StockLtd for free.

So How Is Qingdao East Steel Tower StockLtd's ROCE Trending?

Qingdao East Steel Tower StockLtd is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 46% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Qingdao East Steel Tower StockLtd's ROCE

In summary, we're delighted to see that Qingdao East Steel Tower StockLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Qingdao East Steel Tower StockLtd does have some risks though, and we've spotted 2 warning signs for Qingdao East Steel Tower StockLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com