To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jiangsu Hengshun Vinegar-IndustryLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥146m ÷ (CN¥4.0b - CN¥455m) (Based on the trailing twelve months to September 2023).
Thus, Jiangsu Hengshun Vinegar-IndustryLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.
View our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd
SHSE:600305 Return on Capital Employed December 20th 2023
Above you can see how the current ROCE for Jiangsu Hengshun Vinegar-IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jiangsu Hengshun Vinegar-IndustryLtd.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 65%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jiangsu Hengshun Vinegar-IndustryLtd's earnings and if they change as a result from the capital raise.
On a side note, Jiangsu Hengshun Vinegar-IndustryLtd has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Jiangsu Hengshun Vinegar-IndustryLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Jiangsu Hengshun Vinegar-IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about Jiangsu Hengshun Vinegar-IndustryLtd, we've spotted 2 warning signs, and 1 of them is a bit concerning.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.
