Some Investors May Be Worried About Shanghai Ziyan Foods' (SHSE:603057) Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai Ziyan Foods (SHSE:603057), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Shanghai Ziyan Foods, this is the formula:

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

0.15 = CN¥327m ÷ (CN¥3.4b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Shanghai Ziyan Foods has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 6.8% it's much better.

Check out our latest analysis for Shanghai Ziyan Foods

Above you can see how the current ROCE for Shanghai Ziyan Foods 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 Shanghai Ziyan Foods for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai Ziyan Foods doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last five years. However it looks like Shanghai Ziyan Foods 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, Shanghai Ziyan Foods has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Shanghai Ziyan Foods' ROCE

In summary, Shanghai Ziyan Foods is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 0.9% in the last year to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shanghai Ziyan Foods (of which 1 is concerning!) that you should know about.

While Shanghai Ziyan Foods 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.