If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Zhongxin Fruit and Juice (Catalist:5EG) and its trend of ROCE, we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Zhongxin Fruit and Juice:

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

0.13 = CN¥17m ÷ (CN¥194m - CN¥65m) (Based on the trailing twelve months to June 2022).

Thus, Zhongxin Fruit and Juice has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 11% generated by the Food industry.

View our latest analysis for Zhongxin Fruit and Juice

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhongxin Fruit and Juice's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Zhongxin Fruit and Juice is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 78%. So we're very much inspired by what we're seeing at Zhongxin Fruit and Juice thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Zhongxin Fruit and Juice has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Zhongxin Fruit and Juice's ROCE

To sum it up, Zhongxin Fruit and Juice has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Zhongxin Fruit and Juice can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Zhongxin Fruit and Juice (including 1 which is concerning) .

While Zhongxin Fruit and Juice may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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