If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at China Youran Dairy Group's (HKG:9858) ROCE trend, we were pretty happy with what we saw.

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 Youran Dairy Group:

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

0.14 = CN¥3.3b ÷ (CN¥36b - CN¥14b) (Based on the trailing twelve months to June 2022).

So, China Youran Dairy Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Food industry.

View our latest analysis for China Youran Dairy Group

In the above chart we have measured China Youran Dairy Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Youran Dairy Group here for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 269% more capital in the last three years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that China Youran Dairy Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

In the end, China Youran Dairy Group has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 56%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

China Youran Dairy Group does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.