If you’re looking for a multi-bagger, there are a few things to watch out for. Ideally, a business will exhibit two trends; first is growing come back on capital employed (ROCE) and secondly, the increase value of working capital. In other words, these types of businesses are compounding machines, meaning they keep reinvesting their profits at a higher rate of return. In its light, when we looked Yantai China Pet Foods (SZSE:002891) and its ROCE trend, we’re not exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from the capital it uses in its business. The formula for this calculation at Yantai China Pet Foods is:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.09 = CN¥281m ÷ (CN¥4.2b – CN¥1.1b) (Based on the last twelve months to September 2023).
So, Yantai China Pet Foods had a ROCE of 9.0%. In absolute terms, that’s a low return but it’s around the Food industry average of 7.6%.
Check out our latest review for Yantai China Pet Foods
In the chart above, we measured Yantai China Pet Foods’ past ROCE against its past performance, but the future is more important. If you are interested, you can check the analyst predictions in our Free analyst report for Yantai China Pet Foods .
What the ROCE Trend Can Tell Us
In terms of Yantai China Pet Foods’ historical ROCE trend, it doesn’t exactly warrant attention. The company has consistently gained 9.0% over the past five years, and capital employed within the business has increased 277% during that time. This weak ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the business is not deploying funds in high return investment.
The Bottom Line
As we have seen above, Yantai China Pet Foods does not increase its return on capital but it reinvests in the business. Even the market should expect these trends to improve as the stock has gained 81% in the past five years. Ultimately, if the underlying trends continue, we cannot hold our breath on being a multi-bagger going forward.
While Yantai China Pet Foods doesn’t quite shine in this regard, it’s still worth seeing if the company trades at attractive prices. You can find that out in our FREE intrinsic value estimate for 002891 on our platform.
While Yantai China Pet Foods may not currently earn the highest returns, we have compiled a list of companies currently earning more than 25% return on equity. look at this Free list here.
Valuation is complicated, but we help make it simple.
Find out if Yantai China Pet Foods is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider transactions and financial health.
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This Simply Wall St article is general. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals, or your financial situation. We aim to bring you long-term focused analysis driven by primary data. Note that our review may not factor in the company’s latest price-sensitive or material quality announcements. Simply Wall St has no position in any of the stocks mentioned.
