If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Tobacco International (HK)'s (HKG:6055) returns on capital, so let's have a look.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for China Tobacco International (HK):

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).

So, China Tobacco International (HK) has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for China Tobacco International (HK)

Above you can see how the current ROCE for China Tobacco International (HK) 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 China Tobacco International (HK) for free.

What The Trend Of ROCE Can Tell Us

China Tobacco International (HK) is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 37%. The amount of capital employed has increased too, by 101%. So we're very much inspired by what we're seeing at China Tobacco International (HK) thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 67% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On China Tobacco International (HK)'s ROCE

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. Since the stock has returned a staggering 140% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for China Tobacco International (HK) you'll probably want to know about.

China Tobacco International (HK) 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.

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.