Lao Feng Xiang (SHSE:600612) Might Become A Compounding Machine

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, the ROCE of Lao Feng Xiang (SHSE:600612) looks attractive right now, so lets see what the trend of returns can tell us.

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 Lao Feng Xiang:

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

0.28 = CN¥4.2b ÷ (CN¥33b - CN¥18b) (Based on the trailing twelve months to March 2024).

So, Lao Feng Xiang has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

View our latest analysis for Lao Feng Xiang

Above you can see how the current ROCE for Lao Feng Xiang 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 Lao Feng Xiang .

What Can We Tell From Lao Feng Xiang's ROCE Trend?

It's hard not to be impressed by Lao Feng Xiang's returns on capital. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 65% more capital into its operations. 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.

On a separate but related note, it's important to know that Lao Feng Xiang has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Lao Feng Xiang has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 2.6% return to shareholders who held over that period. So to determine if Lao Feng Xiang is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While Lao Feng Xiang looks impressive, no company is worth an infinite price. The intrinsic value infographic for 600612 helps visualize whether it is currently trading for a fair price.

Lao Feng Xiang is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.