Returns On Capital Signal Tricky Times Ahead For Foshan Haitian Flavouring and Food (SHSE:603288)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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. The formula for this calculation on Foshan Haitian Flavouring and Food is:

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

0.20 = CN¥6.1b ÷ (CN¥37b - CN¥5.8b) (Based on the trailing twelve months to March 2024).

So, Foshan Haitian Flavouring and Food has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Food industry average of 7.6%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Foshan Haitian Flavouring and Food .

How Are Returns Trending?

When we looked at the ROCE trend at Foshan Haitian Flavouring and Food, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 32%. 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 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. Since the stock has declined 29% 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.

One more thing: We've identified 2 warning signs with Foshan Haitian Flavouring and Food (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com