China National Gold Group Gold JewelleryLtd (SHSE:600916) Might Become A Compounding Machine

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at China National Gold Group Gold JewelleryLtd (SHSE:600916), we liked what we saw.

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. The formula for this calculation on China National Gold Group Gold JewelleryLtd is:

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

0.24 = CN¥1.8b ÷ (CN¥12b - CN¥4.7b) (Based on the trailing twelve months to June 2024).

Thus, China National Gold Group Gold JewelleryLtd has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.1% earned by companies in a similar industry.

See our latest analysis for China National Gold Group Gold JewelleryLtd

In the above chart we have measured China National Gold Group Gold JewelleryLtd'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 China National Gold Group Gold JewelleryLtd .

So How Is China National Gold Group Gold JewelleryLtd's ROCE Trending?

We'd be pretty happy with returns on capital like China National Gold Group Gold JewelleryLtd. The company has employed 67% more capital in the last five years, and the returns on that capital have remained stable at 24%. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On China National Gold Group Gold JewelleryLtd's ROCE

China National Gold Group Gold JewelleryLtd has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, despite the favorable fundamentals, the stock has fallen 38% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Like most companies, China National Gold Group Gold JewelleryLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.