Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So when we looked at Anhui Guangxin Agrochemical (SHSE:603599) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Anhui Guangxin Agrochemical is:

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

0.19 = CN¥1.8b ÷ (CN¥15b - CN¥5.2b) (Based on the trailing twelve months to September 2023).

Thus, Anhui Guangxin Agrochemical has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Chemicals industry.

See our latest analysis for Anhui Guangxin Agrochemical

Above you can see how the current ROCE for Anhui Guangxin Agrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Anhui Guangxin Agrochemical.

What Does the ROCE Trend For Anhui Guangxin Agrochemical Tell Us?

Anhui Guangxin Agrochemical is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 110% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Anhui Guangxin Agrochemical's ROCE

All in all, it's terrific to see that Anhui Guangxin Agrochemical is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 207% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Anhui Guangxin Agrochemical can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Anhui Guangxin Agrochemical that we think you should be aware of.

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.