If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Guangdong Baolihua New Energy Stock's (SZSE:000690) returns on capital, so let's have a look.

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

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 Guangdong Baolihua New Energy Stock is:

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

0.071 = CN¥1.2b ÷ (CN¥21b - CN¥4.0b) (Based on the trailing twelve months to June 2024).

So, Guangdong Baolihua New Energy Stock has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Renewable Energy industry, it's much better.

Above you can see how the current ROCE for Guangdong Baolihua New Energy Stock compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Baolihua New Energy Stock for free.

So How Is Guangdong Baolihua New Energy Stock's ROCE Trending?

Guangdong Baolihua New Energy Stock is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 57% whilst employing roughly the same amount of capital. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To bring it all together, Guangdong Baolihua New Energy Stock has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Guangdong Baolihua New Energy Stock, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Guangdong Baolihua New Energy Stock 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.