If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Juneyao Grand Healthy DrinksCo.Ltd (SHSE:605388), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Juneyao Grand Healthy DrinksCo.Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CN¥84m ÷ (CN¥2.4b - CN¥358m) (Based on the trailing twelve months to September 2023).
Thus, Juneyao Grand Healthy DrinksCo.Ltd has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.
In the above chart we have measured Juneyao Grand Healthy DrinksCo.Ltd'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 analyst report for Juneyao Grand Healthy DrinksCo.Ltd .
So How Is Juneyao Grand Healthy DrinksCo.Ltd's ROCE Trending?
On the surface, the trend of ROCE at Juneyao Grand Healthy DrinksCo.Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 44% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Juneyao Grand Healthy DrinksCo.Ltd has done well to pay down its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Juneyao Grand Healthy DrinksCo.Ltd's ROCE
While returns have fallen for Juneyao Grand Healthy DrinksCo.Ltd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 48% over 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'd like to know more about Juneyao Grand Healthy DrinksCo.Ltd, we've spotted 3 warning signs, and 1 of them is concerning.
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.
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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.