If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, the ROCE of Spring of Nongfu (HKG:9633) looks attractive right now, so let’s see what the yield trend can tell us.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used 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 last twelve months to December 2021).
Therefore, Nongfu Spring has a ROCE of 41%. This is a fantastic return and not only that, it tops the 10.0% average earned by companies in a similar industry.
Check out our latest analysis for Nongfu Spring
Above, you can see how Nongfu Spring’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
Nongfu Spring deserves credit for their comebacks. Over the past four years, ROCE has remained relatively stable at around 41% and the company has deployed 86% more capital into its operations. Now considering the ROCE is an attractive 41%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If Nongfu Spring can continue like this, we would be very optimistic about its future.
Our view on Nongfu Spring ROCE
In short, we would say that Nongfu Spring has the makings of a multi-bagger as it has been able to compound its capital at very profitable rates of return. So it’s no surprise that shareholders have earned a respectable 9.9% return if they’ve held over the past year. So while the stock may be more “expensive” than it was before, we believe the strong fundamentals warrant this stock for further research.
On a separate note, we found 1 warning sign for Nongfu Spring you will probably want to know more.
Nongfu Spring is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.