SDIC Zhonglu Fruit JuiceLtd's (SHSE:600962) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think SDIC Zhonglu Fruit JuiceLtd (SHSE:600962) 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)

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. To calculate this metric for SDIC Zhonglu Fruit JuiceLtd, this is the formula:

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

0.057 = CN¥56m ÷ (CN¥2.2b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Therefore, SDIC Zhonglu Fruit JuiceLtd has an ROCE of 5.7%. On its own, that's a low figure but it's around the 6.8% average generated by the Food industry.

Check out our latest analysis for SDIC Zhonglu Fruit JuiceLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how SDIC Zhonglu Fruit JuiceLtd has performed in the past in other metrics, you can view this free graph of SDIC Zhonglu Fruit JuiceLtd's past earnings, revenue and cash flow.

So How Is SDIC Zhonglu Fruit JuiceLtd's ROCE Trending?

There hasn't been much to report for SDIC Zhonglu Fruit JuiceLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if SDIC Zhonglu Fruit JuiceLtd doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 55% of total assets, this reported ROCE would probably be less than5.7% because total capital employed would be higher.The 5.7% ROCE could be even lower if current liabilities weren't 55% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Key Takeaway

In summary, SDIC Zhonglu Fruit JuiceLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about SDIC Zhonglu Fruit JuiceLtd, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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.