Be Wary Of Foshan Haitian Flavouring and Food (SHSE:603288) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Foshan Haitian Flavouring and Food (SHSE:603288), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Foshan Haitian Flavouring and Food, this is the formula:

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

0.22 = CN¥6.2b ÷ (CN¥35b - CN¥6.2b) (Based on the trailing twelve months to June 2024).

Therefore, Foshan Haitian Flavouring and Food has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Food industry average of 7.2%.

See our latest analysis for Foshan Haitian Flavouring and Food

Above you can see how the current ROCE for Foshan Haitian Flavouring and Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Foshan Haitian Flavouring and Food .

How Are Returns Trending?

In terms of Foshan Haitian Flavouring and Food's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 37%, but they have dropped over the last five years. However it looks like Foshan Haitian Flavouring and Food 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.

What We Can Learn From Foshan Haitian Flavouring and Food's ROCE

To conclude, we've found that Foshan Haitian Flavouring and Food is reinvesting in the business, but returns have been falling. 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.

One more thing to note, we've identified 1 warning sign with Foshan Haitian Flavouring and Food and understanding this should be part of your investment process.

Foshan Haitian Flavouring and Food is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.