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. That's why when we briefly looked at Suofeiya Home Collection's (SZSE:002572) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Suofeiya Home Collection, this is the formula:

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

0.20 = CN¥1.7b ÷ (CN¥13b - CN¥4.9b) (Based on the trailing twelve months to March 2024).

So, Suofeiya Home Collection has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 8.4%.

In the above chart we have measured Suofeiya Home Collection's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Suofeiya Home Collection .

What Does the ROCE Trend For Suofeiya Home Collection Tell Us?

We'd be pretty happy with returns on capital like Suofeiya Home Collection. The company has employed 60% more capital in the last five years, and the returns on that capital have remained stable at 20%. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Suofeiya Home Collection can keep this up, we'd be very optimistic about its future.

In Conclusion...

In summary, we're delighted to see that Suofeiya Home Collection has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing, we've spotted 2 warning signs facing Suofeiya Home Collection that you might find interesting.

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.

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