Why The 31% Return On Capital At Qingdao Gaoce Technology (SHSE:688556) Should Have Your Attention

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Qingdao Gaoce Technology's (SHSE:688556) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Qingdao Gaoce Technology, this is the formula:

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

0.31 = CN¥1.5b ÷ (CN¥9.3b - CN¥4.3b) (Based on the trailing twelve months to March 2024).

So, Qingdao Gaoce Technology has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 3.9% earned by companies in a similar industry.

Check out our latest analysis for Qingdao Gaoce Technology

In the above chart we have measured Qingdao Gaoce Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Qingdao Gaoce Technology for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Qingdao Gaoce Technology. The data shows that returns on capital have increased substantially over the last five years to 31%. The amount of capital employed has increased too, by 1,473%. 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.

One more thing to note, Qingdao Gaoce Technology has decreased current liabilities to 47% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Qingdao Gaoce Technology's ROCE

In summary, it's great to see that Qingdao Gaoce Technology 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. Since the stock has returned a staggering 111% to shareholders over the last three years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Qingdao Gaoce Technology we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com