Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Qinghai Huzhu TianYouDe Highland Barley Spirit (SZSE:002646) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Qinghai Huzhu TianYouDe Highland Barley Spirit is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥87m ÷ (CN¥3.3b - CN¥444m) (Based on the trailing twelve months to September 2023).
So, Qinghai Huzhu TianYouDe Highland Barley Spirit has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Beverage industry average of 12%.
Check out our latest analysis for Qinghai Huzhu TianYouDe Highland Barley Spirit
In the above chart we have measured Qinghai Huzhu TianYouDe Highland Barley Spirit's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Qinghai Huzhu TianYouDe Highland Barley Spirit's ROCE Trend?
There are better returns on capital out there than what we're seeing at Qinghai Huzhu TianYouDe Highland Barley Spirit. The company has consistently earned 3.0% for the last five years, and the capital employed within the business has risen 20% 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.
The Key Takeaway
Long story short, while Qinghai Huzhu TianYouDe Highland Barley Spirit has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Qinghai Huzhu TianYouDe Highland Barley Spirit and understanding it should be part of your investment process.
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.