If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Hubei Xingfa Chemicals Group's (SHSE:600141) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hubei Xingfa Chemicals Group, this is the formula:

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

0.12 = CN¥3.7b ÷ (CN¥42b - CN¥11b) (Based on the trailing twelve months to June 2023).

Thus, Hubei Xingfa Chemicals Group 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 Chemicals industry.

Check out our latest analysis for Hubei Xingfa Chemicals Group

In the above chart we have measured Hubei Xingfa Chemicals Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hubei Xingfa Chemicals Group here for free.

What Does the ROCE Trend For Hubei Xingfa Chemicals Group Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 138% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Hubei Xingfa Chemicals Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 25% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Hubei Xingfa Chemicals Group's ROCE

To sum it up, Hubei Xingfa Chemicals Group has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Hubei Xingfa Chemicals Group (of which 1 is potentially serious!) that you should 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.