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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Foshan Haitian Flavouring and Food (SHSE:603288) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. To calculate this metric for Foshan Haitian Flavouring and Food, this is the formula:

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).

So, 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%.

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 for free.

How Are Returns Trending?

In terms of Foshan Haitian Flavouring and Food's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 35% where it was five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Foshan Haitian Flavouring and Food's ROCE

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. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Foshan Haitian Flavouring and Food does have some risks though, and we've spotted 1 warning sign for Foshan Haitian Flavouring and Food that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.