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. 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. Although, when we looked at Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337), it didn't seem to tick all of these boxes.

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 Zhe Jiang Li Zi Yuan FoodLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.095 = CN¥238m ÷ (CN¥3.1b - CN¥581m) (Based on the trailing twelve months to September 2023).

So, Zhe Jiang Li Zi Yuan FoodLtd has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.6% generated by the Food industry, it's much better.

In the above chart we have measured Zhe Jiang Li Zi Yuan FoodLtd'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 analyst report for Zhe Jiang Li Zi Yuan FoodLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Zhe Jiang Li Zi Yuan FoodLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 31% five years ago. 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.

On a related note, Zhe Jiang Li Zi Yuan FoodLtd has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Zhe Jiang Li Zi Yuan FoodLtd's ROCE

To conclude, we've found that Zhe Jiang Li Zi Yuan FoodLtd is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last three years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Zhe Jiang Li Zi Yuan FoodLtd, we've discovered 2 warning signs that you should be aware of.

While Zhe Jiang Li Zi Yuan FoodLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.