Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Jiangsu Hengshun Vinegar-IndustryLtd:

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

0.024 = CN¥84m ÷ (CN¥3.9b - CN¥410m) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Hengshun Vinegar-IndustryLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.

Check out our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd

In the above chart we have measured Jiangsu Hengshun Vinegar-IndustryLtd'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 Jiangsu Hengshun Vinegar-IndustryLtd for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Jiangsu Hengshun Vinegar-IndustryLtd's ROCE has reduced by 81% over the last five years, while the business employed 54% more capital. Usually this isn't ideal, but given Jiangsu Hengshun Vinegar-IndustryLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Jiangsu Hengshun Vinegar-IndustryLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Hengshun Vinegar-IndustryLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 38% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Jiangsu Hengshun Vinegar-IndustryLtd (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Jiangsu Hengshun Vinegar-IndustryLtd 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.