Investors Will Want Guangdong Chj IndustryLtd's (SZSE:002345) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Guangdong Chj IndustryLtd (SZSE:002345) and its trend of ROCE, we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong Chj IndustryLtd:

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

0.11 = CN¥456m ÷ (CN¥6.0b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

So, Guangdong Chj IndustryLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 6.6% it's much better.

View our latest analysis for Guangdong Chj IndustryLtd

Above you can see how the current ROCE for Guangdong Chj IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Chj IndustryLtd for free.

What Does the ROCE Trend For Guangdong Chj IndustryLtd Tell Us?

Guangdong Chj IndustryLtd's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 44% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

To sum it up, Guangdong Chj IndustryLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 164% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Guangdong Chj IndustryLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Guangdong Chj IndustryLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.