If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337), 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 Zhe Jiang Li Zi Yuan FoodLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = CN¥238m ÷ (CN¥3.1b - CN¥581m) (Based on the trailing twelve months to September 2023).
So, Zhe Jiang Li Zi Yuan FoodLtd has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.5%.
View our latest analysis for Zhe Jiang Li Zi Yuan FoodLtd
Above you can see how the current ROCE for Zhe Jiang Li Zi Yuan FoodLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Zhe Jiang Li Zi Yuan FoodLtd's ROCE Trending?
On the surface, the trend of ROCE at Zhe Jiang Li Zi Yuan FoodLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Zhe Jiang Li Zi Yuan FoodLtd has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Zhe Jiang Li Zi Yuan FoodLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 13% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing to note, we've identified 2 warning signs with Zhe Jiang Li Zi Yuan FoodLtd and understanding these should be part of your investment process.
While Zhe Jiang Li Zi Yuan FoodLtd 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.
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.