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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Zhejiang Guyuelongshan Shaoxing WineLtd (SHSE:600059) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on Zhejiang Guyuelongshan Shaoxing WineLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥196m ÷ (CN¥6.4b - CN¥803m) (Based on the trailing twelve months to September 2023).
So, Zhejiang Guyuelongshan Shaoxing WineLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Beverage industry average of 12%.
View our latest analysis for Zhejiang Guyuelongshan Shaoxing WineLtd
In the above chart we have measured Zhejiang Guyuelongshan Shaoxing WineLtd'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 Does the ROCE Trend For Zhejiang Guyuelongshan Shaoxing WineLtd Tell Us?
When we looked at the ROCE trend at Zhejiang Guyuelongshan Shaoxing WineLtd, we didn't gain much confidence. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 3.5%. 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.
Our Take On Zhejiang Guyuelongshan Shaoxing WineLtd's ROCE
In summary, Zhejiang Guyuelongshan Shaoxing WineLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you'd like to know about the risks facing Zhejiang Guyuelongshan Shaoxing WineLtd, we've discovered 1 warning sign that you should be aware of.
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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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.