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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of China Tobacco International (HK) (HKG:6055) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Tobacco International (HK), this is the formula:

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

0.37 = HK$1.2b ÷ (HK$9.8b - HK$6.5b) (Based on the trailing twelve months to December 2024).

Thus, China Tobacco International (HK) has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 12%.

See our latest analysis for China Tobacco International (HK)

In the above chart we have measured China Tobacco International (HK)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Tobacco International (HK) .

What Does the ROCE Trend For China Tobacco International (HK) Tell Us?

The trends we've noticed at China Tobacco International (HK) are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 37%. The amount of capital employed has increased too, by 101%. 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

All in all, it's terrific to see that China Tobacco International (HK) is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. In light of that, we think it's worth looking further into this stock because if China Tobacco International (HK) can keep these trends up, it could have a bright future ahead.

While China Tobacco International (HK) looks impressive, no company is worth an infinite price. The intrinsic value infographic for 6055 helps visualize whether it is currently trading for a fair price.

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.

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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.