Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Qinghai Huzhu TianYouDe Highland Barley Spirit (SZSE:002646) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Qinghai Huzhu TianYouDe Highland Barley Spirit:

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

0.043 = CN¥124m ÷ (CN¥3.3b - CN¥452m) (Based on the trailing twelve months to June 2024).

Therefore, Qinghai Huzhu TianYouDe Highland Barley Spirit has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 16%.

In the above chart we have measured Qinghai Huzhu TianYouDe Highland Barley Spirit'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 Qinghai Huzhu TianYouDe Highland Barley Spirit .

What Does the ROCE Trend For Qinghai Huzhu TianYouDe Highland Barley Spirit Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at Qinghai Huzhu TianYouDe Highland Barley Spirit thanks to its ability to profitably reinvest capital.

Our Take On Qinghai Huzhu TianYouDe Highland Barley Spirit's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Qinghai Huzhu TianYouDe Highland Barley Spirit has. And since the stock has fallen 16% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Qinghai Huzhu TianYouDe Highland Barley Spirit, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.