What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Baotou Dongbao Bio-TechLtd (SZSE:300239) and its trend of ROCE, we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Baotou Dongbao Bio-TechLtd:

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

0.046 = CN¥114m ÷ (CN¥2.8b - CN¥326m) (Based on the trailing twelve months to June 2024).

So, Baotou Dongbao Bio-TechLtd has an ROCE of 4.6%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Baotou Dongbao Bio-TechLtd has performed in the past in other metrics, you can view this free graph of Baotou Dongbao Bio-TechLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Baotou Dongbao Bio-TechLtd 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 data shows that returns on capital have increased substantially over the last five years to 4.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 135% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Baotou Dongbao Bio-TechLtd's ROCE

To sum it up, Baotou Dongbao Bio-TechLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 18% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 300239 that compares the share price and estimated value.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.