If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hunan Xiangjia Animal HusbandryLtd (SZSE:002982), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hunan Xiangjia Animal HusbandryLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CN¥46m ÷ (CN¥3.8b - CN¥878m) (Based on the trailing twelve months to June 2023).
Thus, Hunan Xiangjia Animal HusbandryLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.
Check out our latest analysis for Hunan Xiangjia Animal HusbandryLtd
In the above chart we have measured Hunan Xiangjia Animal HusbandryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hunan Xiangjia Animal HusbandryLtd.
The Trend Of ROCE
When we looked at the ROCE trend at Hunan Xiangjia Animal HusbandryLtd, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Hunan Xiangjia Animal HusbandryLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hunan Xiangjia Animal HusbandryLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 58% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing Hunan Xiangjia Animal HusbandryLtd we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.
While Hunan Xiangjia Animal HusbandryLtd isn't earning the highest return, check out this free list of companies that are 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.