Zhejiang Guyuelongshan Shaoxing WineLtd (SHSE:600059) Might Be Having Difficulty Using Its Capital Effectively

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhejiang Guyuelongshan Shaoxing WineLtd (SHSE:600059), 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. To calculate this metric for Zhejiang Guyuelongshan Shaoxing WineLtd, this is the formula:

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

0.036 = CN¥209m ÷ (CN¥6.4b - CN¥595m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Guyuelongshan Shaoxing WineLtd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Beverage industry average of 17%.

Check out our latest analysis for Zhejiang Guyuelongshan Shaoxing WineLtd

Above you can see how the current ROCE for Zhejiang Guyuelongshan Shaoxing WineLtd 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 Zhejiang Guyuelongshan Shaoxing WineLtd .

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang Guyuelongshan Shaoxing WineLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 4.5% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Guyuelongshan Shaoxing WineLtd. These trends are starting to be recognized by investors since the stock has delivered a 0.4% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Zhejiang Guyuelongshan Shaoxing WineLtd (of which 1 is significant!) that you should know about.

While Zhejiang Guyuelongshan Shaoxing WineLtd 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.