Returns On Capital At Inner Mongolia Yili Industrial Group (SHSE:600887) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.15 = CN¥11b ÷ (CN¥151b - CN¥79b) (Based on the trailing twelve months to September 2024).

So, Inner Mongolia Yili Industrial Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

Check out our latest analysis for Inner Mongolia Yili Industrial Group

Above you can see how the current ROCE for Inner Mongolia Yili Industrial Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Inner Mongolia Yili Industrial Group for free.

What Does the ROCE Trend For Inner Mongolia Yili Industrial Group Tell Us?

When we looked at the ROCE trend at Inner Mongolia Yili Industrial Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Inner Mongolia Yili Industrial Group has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. 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.

What We Can Learn From 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, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you're still interested in Inner Mongolia Yili Industrial Group it's worth checking out our FREE intrinsic value approximation for 600887 to see if it's trading at an attractive price in other respects.

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.