Inner Mongolia Yili Industrial Group's (SHSE:600887) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Inner Mongolia Yili Industrial Group (SHSE:600887) and its ROCE trend, we weren't 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 capital employed in its business. Analysts use this formula to calculate it for Inner Mongolia Yili Industrial Group:

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

0.14 = CN¥11b ÷ (CN¥161b - CN¥81b) (Based on the trailing twelve months to March 2024).

Therefore, Inner Mongolia Yili Industrial Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

Check out our latest analysis for Inner Mongolia Yili Industrial Group

In the above chart we have measured Inner Mongolia Yili Industrial Group'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 Inner Mongolia Yili Industrial Group for free.

What Can We Tell From Inner Mongolia Yili Industrial Group's ROCE Trend?

In terms of Inner Mongolia Yili Industrial Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Inner Mongolia Yili Industrial Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Inner Mongolia Yili Industrial Group's current liabilities are still rather high at 50% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Inner Mongolia Yili Industrial Group's ROCE

In summary, Inner Mongolia Yili Industrial Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Inner Mongolia Yili Industrial Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600887 on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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