Here's What Nongfu Spring's (HKG:9633) Strong Returns On Capital Mean

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Nongfu Spring's (HKG:9633) ROCE trend, we were very happy with what we saw.

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. The formula for this calculation on Nongfu Spring is:

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

0.38 = CN¥9.4b ÷ (CN¥39b - CN¥15b) (Based on the trailing twelve months to December 2022).

Thus, Nongfu Spring has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View 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'd like, you can check out the forecasts from the analysts covering Nongfu Spring here for free.

What The Trend Of ROCE Can Tell Us

Nongfu Spring deserves to be commended in regards to it's returns. The company has consistently earned 38% for the last five years, and the capital employed within the business has risen 116% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line On Nongfu Spring's ROCE

In summary, we're delighted to see that Nongfu Spring has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last year, the stock has only delivered a 1.2% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

While Nongfu Spring looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 9633 is currently trading for a fair price.

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.