A Look Into Lao Feng Xiang's (SHSE:600612) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Lao Feng Xiang's (SHSE:600612) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lao Feng Xiang is:

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

0.29 = CN¥4.0b ÷ (CN¥26b - CN¥13b) (Based on the trailing twelve months to December 2023).

Therefore, Lao Feng Xiang has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 5.9% earned by companies in a similar industry.

See our latest analysis for Lao Feng Xiang

In the above chart we have measured Lao Feng Xiang'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 Lao Feng Xiang .

What Does the ROCE Trend For Lao Feng Xiang Tell Us?

We'd be pretty happy with returns on capital like Lao Feng Xiang. The company has consistently earned 29% for the last five years, and the capital employed within the business has risen 65% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Lao Feng Xiang can keep this up, we'd be very optimistic about its future.

Another thing to note, Lao Feng Xiang has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, we're delighted to see that Lao Feng Xiang has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 102% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600612 on our platform that is definitely worth checking out.

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.