Capital Investments At Nongfu Spring (HKG:9633) Point To A Promising Future

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Nongfu Spring (HKG:9633) looks attractive right now, so lets see what the trend of returns can tell us.

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 Nongfu Spring is:

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

0.41 = CN¥8.7b ÷ (CN¥33b - CN¥12b) (Based on the trailing twelve months to December 2021).

Therefore, Nongfu Spring has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

Check out our latest analysis for Nongfu Spring

Above you can see how the current ROCE for Nongfu Spring compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Nongfu Spring deserves to be commended in regards to it's returns. Over the past four years, ROCE has remained relatively flat at around 41% and the business has deployed 86% more capital into its operations. Now considering ROCE is an attractive 41%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Nongfu Spring can keep this up, we'd be very optimistic about its future.

Our Take On Nongfu Spring's ROCE

In short, we'd argue Nongfu Spring has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 9.9% return if they held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 1 warning sign for Nongfu Spring you'll probably want to know about.

Nongfu Spring is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.