Foshan Haitian Flavouring and Food (SHSE:603288) Could Be Struggling To Allocate Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Foshan Haitian Flavouring and Food (SHSE:603288), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Foshan Haitian Flavouring and Food:

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

0.21 = CN¥6.5b ÷ (CN¥36b - CN¥5.7b) (Based on the trailing twelve months to September 2024).

Thus, Foshan Haitian Flavouring and Food has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

View our latest analysis for Foshan Haitian Flavouring and Food

In the above chart we have measured Foshan Haitian Flavouring and Food's prior ROCE against its prior performance, but the future is arguably more important. 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 .

What Does the ROCE Trend For Foshan Haitian Flavouring and Food Tell Us?

On the surface, the trend of ROCE at Foshan Haitian Flavouring and Food doesn't inspire confidence. Historically returns on capital were even higher at 36%, but they have dropped 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Foshan Haitian Flavouring and Food has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On 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. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Foshan Haitian Flavouring and Food has the makings of a multi-bagger.

Foshan Haitian Flavouring and Food does have some risks though, and we've spotted 1 warning sign for Foshan Haitian Flavouring and Food that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.