To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Foshan Haitian Flavouring and Food (SHSE:603288), it does have a high ROCE right now, but lets see how returns are trending.
What Is 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 Foshan Haitian Flavouring and Food:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CN¥6.0b ÷ (CN¥35b - CN¥6.2b) (Based on the trailing twelve months to September 2023).
Thus, Foshan Haitian Flavouring and Food has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Food industry average of 7.6%.
View our latest analysis for Foshan Haitian Flavouring and Food
In the above chart we have measured Foshan Haitian Flavouring and Food'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 Foshan Haitian Flavouring and Food here for free.
So How Is Foshan Haitian Flavouring and Food's ROCE Trending?
On the surface, the trend of ROCE at Foshan Haitian Flavouring and Food doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 35%. However it looks like Foshan Haitian Flavouring and Food might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Foshan Haitian Flavouring and Food'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 15% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to continue researching Foshan Haitian Flavouring and Food, you might be interested to know about the 1 warning sign that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.