There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at China Mengniu Dairy (HKG:2319) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Mengniu Dairy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥4.0b ÷ (CN¥105b - CN¥30b) (Based on the trailing twelve months to June 2022).
Therefore, China Mengniu Dairy has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Food industry average of 9.1%.
Check out our latest analysis for China Mengniu Dairy
SEHK:2319 Return on Capital Employed January 26th 2023
Above you can see how the current ROCE for China Mengniu Dairy 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 Mengniu Dairy here for free.
What Does the ROCE Trend For China Mengniu Dairy Tell Us?
In terms of China Mengniu Dairy's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.2% for the last five years, and the capital employed within the business has risen 96% 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.
Our Take On China Mengniu Dairy's ROCE
Long story short, while China Mengniu Dairy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One final note, you should learn about the 2 warning signs we've spotted with China Mengniu Dairy (including 1 which can't be ignored) .
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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