Shanxi Xinghuacun Fen Wine FactoryLtd (SHSE:600809) Is Achieving High Returns On Its Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shanxi Xinghuacun Fen Wine FactoryLtd's (SHSE:600809) returns on capital, so let's have a look.

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. To calculate this metric for Shanxi Xinghuacun Fen Wine FactoryLtd, this is the formula:

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

0.47 = CN¥16b ÷ (CN¥50b - CN¥15b) (Based on the trailing twelve months to September 2024).

So, Shanxi Xinghuacun Fen Wine FactoryLtd has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Beverage industry average of 18%.

See our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

Above you can see how the current ROCE for Shanxi Xinghuacun Fen Wine FactoryLtd 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 Shanxi Xinghuacun Fen Wine FactoryLtd for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Shanxi Xinghuacun Fen Wine FactoryLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 352% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, it's great to see that Shanxi Xinghuacun Fen Wine FactoryLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 232% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Shanxi Xinghuacun Fen Wine FactoryLtd can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Shanxi Xinghuacun Fen Wine FactoryLtd that you might find interesting.

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.