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. 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 on that note, Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Shaanxi Huaqin Technology IndustryLtd, this is the formula:

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

0.044 = CN¥231m ÷ (CN¥5.7b - CN¥416m) (Based on the trailing twelve months to September 2024).

So, Shaanxi Huaqin Technology IndustryLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

In the above chart we have measured Shaanxi Huaqin Technology IndustryLtd'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 Shaanxi Huaqin Technology IndustryLtd .

The Trend Of ROCE

The fact that Shaanxi Huaqin Technology IndustryLtd is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.4% on its capital. Not only that, but the company is utilizing 3,491% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Shaanxi Huaqin Technology IndustryLtd has decreased current liabilities to 7.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Shaanxi Huaqin Technology IndustryLtd's ROCE

Long story short, we're delighted to see that Shaanxi Huaqin Technology IndustryLtd's reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Shaanxi Huaqin Technology IndustryLtd, 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.