There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Anhui Gujing Distillery (SZSE:000596) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
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 Anhui Gujing Distillery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = CN¥5.8b ÷ (CN¥35b - CN¥13b) (Based on the trailing twelve months to September 2023).
Therefore, Anhui Gujing Distillery has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Beverage industry average of 15%.
View our latest analysis for Anhui Gujing Distillery
Above you can see how the current ROCE for Anhui Gujing Distillery 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 report on analyst forecasts for the company.
What Does the ROCE Trend For Anhui Gujing Distillery Tell Us?
Anhui Gujing Distillery deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 186% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line On Anhui Gujing Distillery's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 397% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Anhui Gujing Distillery (of which 1 can't be ignored!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.