What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, State Grid YingdaLtd (SHSE:600517) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on State Grid YingdaLtd is:

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

0.12 = CN¥2.8b ÷ (CN¥45b - CN¥21b) (Based on the trailing twelve months to September 2023).

Therefore, State Grid YingdaLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Electrical industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for State Grid YingdaLtd's ROCE against it's prior returns. If you'd like to look at how State Grid YingdaLtd has performed in the past in other metrics, you can view this free graph of State Grid YingdaLtd's past earnings, revenue and cash flow.

So How Is State Grid YingdaLtd's ROCE Trending?

State Grid YingdaLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 567%. So we're very much inspired by what we're seeing at State Grid YingdaLtd thanks to its ability to profitably reinvest capital.

One more thing to note, State Grid YingdaLtd has decreased current liabilities to 46% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that State Grid YingdaLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From State Grid YingdaLtd's ROCE

In summary, it's great to see that State Grid YingdaLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 1.7% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with State Grid YingdaLtd and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.