If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Xinxiang Richful Lube AdditiveLtd (SZSE:300910) we really liked 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 Xinxiang Richful Lube AdditiveLtd, this is the formula:

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

0.22 = CN¥691m ÷ (CN¥3.6b - CN¥439m) (Based on the trailing twelve months to March 2024).

Thus, Xinxiang Richful Lube AdditiveLtd has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.5%.

In the above chart we have measured Xinxiang Richful Lube AdditiveLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinxiang Richful Lube AdditiveLtd .

What Does the ROCE Trend For Xinxiang Richful Lube AdditiveLtd Tell Us?

Xinxiang Richful Lube AdditiveLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 485%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Xinxiang Richful Lube AdditiveLtd is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 17% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Xinxiang Richful Lube AdditiveLtd, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com