Hebei Yangyuan ZhiHui Beverage (SHSE:603156) Has Some Way To Go To Become A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Hebei Yangyuan ZhiHui Beverage (SHSE:603156) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hebei Yangyuan ZhiHui Beverage, this is the formula:

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

0.18 = CN¥1.9b ÷ (CN¥12b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Therefore, Hebei Yangyuan ZhiHui Beverage has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

View our latest analysis for Hebei Yangyuan ZhiHui Beverage

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hebei Yangyuan ZhiHui Beverage.

How Are Returns Trending?

Things have been pretty stable at Hebei Yangyuan ZhiHui Beverage, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Hebei Yangyuan ZhiHui Beverage to be a multi-bagger going forward.

The Bottom Line On Hebei Yangyuan ZhiHui Beverage's ROCE

In summary, Hebei Yangyuan ZhiHui Beverage isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Hebei Yangyuan ZhiHui Beverage (including 1 which is a bit unpleasant) .

While Hebei Yangyuan ZhiHui Beverage 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.