If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Xinxiang Richful Lube AdditiveLtd's (SZSE:300910) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Xinxiang Richful Lube AdditiveLtd:

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

0.23 = CN¥724m ÷ (CN¥3.8b - CN¥650m) (Based on the trailing twelve months to June 2024).

So, Xinxiang Richful Lube AdditiveLtd has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

Above you can see how the current ROCE for Xinxiang Richful Lube AdditiveLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Xinxiang Richful Lube AdditiveLtd .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Xinxiang Richful Lube AdditiveLtd. The data shows that returns on capital have increased substantially over the last five years to 23%. 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 375%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Xinxiang Richful Lube AdditiveLtd's ROCE

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. Considering the stock has delivered 10% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know more about Xinxiang Richful Lube AdditiveLtd, we've spotted 2 warning signs, and 1 of them is potentially serious.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.