If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at Yantai China Pet Foods (SZSE:002891), it didn't seem to tick all of these boxes.

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 Yantai China Pet Foods:

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

0.09 = CN¥281m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Yantai China Pet Foods has an ROCE of 9.0%. On its own, that's a low figure but it's around the 7.5% average generated by the Food industry.

See our latest analysis for Yantai China Pet Foods

In the above chart we have measured Yantai China Pet Foods' 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 Yantai China Pet Foods here for free.

What Can We Tell From Yantai China Pet Foods' ROCE Trend?

The returns on capital haven't changed much for Yantai China Pet Foods in recent years. The company has consistently earned 9.0% for the last five years, and the capital employed within the business has risen 277% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Yantai China Pet Foods' ROCE

In summary, Yantai China Pet Foods has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 101% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Yantai China Pet Foods could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Yantai China Pet Foods 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.

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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.