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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Sichuan Kexin Mechanical and Electrical EquipmentLtd (SZSE:300092) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Sichuan Kexin Mechanical and Electrical EquipmentLtd:

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

0.12 = CN¥191m ÷ (CN¥2.2b - CN¥634m) (Based on the trailing twelve months to June 2024).

Thus, Sichuan Kexin Mechanical and Electrical EquipmentLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Machinery industry.

Above you can see how the current ROCE for Sichuan Kexin Mechanical and Electrical EquipmentLtd 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 Sichuan Kexin Mechanical and Electrical EquipmentLtd .

How Are Returns Trending?

We like the trends that we're seeing from Sichuan Kexin Mechanical and Electrical EquipmentLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 173%. So we're very much inspired by what we're seeing at Sichuan Kexin Mechanical and Electrical EquipmentLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Sichuan Kexin Mechanical and Electrical EquipmentLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Sichuan Kexin Mechanical and Electrical EquipmentLtd you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.