Returns On Capital At Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305), it didn't seem to tick all of these boxes.

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 Jiangsu Hengshun Vinegar-IndustryLtd is:

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

0.041 = CN¥146m ÷ (CN¥4.0b - CN¥455m) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Hengshun Vinegar-IndustryLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

See our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd

Above you can see how the current ROCE for Jiangsu Hengshun Vinegar-IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Hengshun Vinegar-IndustryLtd .

So How Is Jiangsu Hengshun Vinegar-IndustryLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 65%. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jiangsu Hengshun Vinegar-IndustryLtd's earnings and if they change as a result from the capital raise.

On a side note, Jiangsu Hengshun Vinegar-IndustryLtd has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Jiangsu Hengshun Vinegar-IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Hengshun Vinegar-IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last five years. 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 want to know some of the risks facing Jiangsu Hengshun Vinegar-IndustryLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.