Hebei Hengshui Laobaigan Liquor (SHSE:600559) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Hebei Hengshui Laobaigan Liquor's (SHSE:600559) returns on capital, so let's have a look.

What Is 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 Hebei Hengshui Laobaigan Liquor:

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

0.16 = CN¥826m ÷ (CN¥10b - CN¥5.1b) (Based on the trailing twelve months to March 2024).

Therefore, Hebei Hengshui Laobaigan Liquor has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 17% generated by the Beverage industry.

Check out our latest analysis for Hebei Hengshui Laobaigan Liquor

In the above chart we have measured Hebei Hengshui Laobaigan Liquor'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 Hebei Hengshui Laobaigan Liquor .

The Trend Of ROCE

Hebei Hengshui Laobaigan Liquor is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 54%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Hebei Hengshui Laobaigan Liquor has a high ratio of current liabilities to total assets of 50%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Hebei Hengshui Laobaigan Liquor's ROCE

All in all, it's terrific to see that Hebei Hengshui Laobaigan Liquor is reaping the rewards from prior investments and is growing its capital base. And a remarkable 106% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to continue researching Hebei Hengshui Laobaigan Liquor, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.