If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Luzhou LaojiaoLtd (SZSE:000568) we really liked what we saw.
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. Analysts use this formula to calculate it for Luzhou LaojiaoLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = CN¥15b ÷ (CN¥62b - CN¥14b) (Based on the trailing twelve months to June 2023).
Therefore, Luzhou LaojiaoLtd has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Beverage industry average of 22%.
See our latest analysis for Luzhou LaojiaoLtd
Above you can see how the current ROCE for Luzhou LaojiaoLtd 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 Luzhou LaojiaoLtd here for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Luzhou LaojiaoLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 32%. The amount of capital employed has increased too, by 205%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Luzhou LaojiaoLtd's ROCE
All in all, it's terrific to see that Luzhou LaojiaoLtd is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Luzhou LaojiaoLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
Luzhou LaojiaoLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
