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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Yongxing Special Materials TechnologyLtd's (SZSE:002756) returns on capital, so let's have a 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. The formula for this calculation on Yongxing Special Materials TechnologyLtd is:

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

0.22 = CN¥3.0b ÷ (CN¥16b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

So, Yongxing Special Materials TechnologyLtd has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 6.7%.

Above you can see how the current ROCE for Yongxing Special Materials TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Yongxing Special Materials TechnologyLtd .

So How Is Yongxing Special Materials TechnologyLtd's ROCE Trending?

We like the trends that we're seeing from Yongxing Special Materials TechnologyLtd. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 273%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Yongxing Special Materials TechnologyLtd's ROCE

In summary, it's great to see that Yongxing Special Materials TechnologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 285% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

Yongxing Special Materials TechnologyLtd does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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