If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Guangdong Yuehai Feeds GroupLtd (SZSE:001313), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Guangdong Yuehai Feeds GroupLtd is:

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

0.033 = CN¥93m ÷ (CN¥5.7b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Yuehai Feeds GroupLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.0%.

Above you can see how the current ROCE for Guangdong Yuehai Feeds GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Yuehai Feeds GroupLtd .

So How Is Guangdong Yuehai Feeds GroupLtd's ROCE Trending?

In terms of Guangdong Yuehai Feeds GroupLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.3% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Guangdong Yuehai Feeds GroupLtd's current liabilities have increased over the last five years to 51% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Guangdong Yuehai Feeds GroupLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Yuehai Feeds GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 22% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Yuehai Feeds GroupLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Guangdong Yuehai Feeds GroupLtd you'll probably want to know about.

While Guangdong Yuehai Feeds GroupLtd 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.