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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Qian Jiang Water Resources DevelopmentLtd (SHSE:600283) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Qian Jiang Water Resources DevelopmentLtd:

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

0.054 = CN¥278m ÷ (CN¥8.2b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Therefore, Qian Jiang Water Resources DevelopmentLtd has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Qian Jiang Water Resources DevelopmentLtd's past further, check out this free graph covering Qian Jiang Water Resources DevelopmentLtd's past earnings, revenue and cash flow.

So How Is Qian Jiang Water Resources DevelopmentLtd's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.4%. The amount of capital employed has increased too, by 50%. So we're very much inspired by what we're seeing at Qian Jiang Water Resources DevelopmentLtd thanks to its ability to profitably reinvest capital.

What We Can Learn From Qian Jiang Water Resources DevelopmentLtd's ROCE

To sum it up, Qian Jiang Water Resources DevelopmentLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So with that in mind, we think the stock deserves further research.

Qian Jiang Water Resources DevelopmentLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Qian Jiang Water Resources DevelopmentLtd 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.

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