Capital Allocation Trends At Great-Sun Foods (SHSE:603336) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Great-Sun Foods (SHSE:603336) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Great-Sun Foods is:

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

0.026 = CN¥36m ÷ (CN¥1.9b - CN¥467m) (Based on the trailing twelve months to June 2024).

Therefore, Great-Sun Foods has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

See our latest analysis for Great-Sun Foods

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're interested in investigating Great-Sun Foods' past further, check out this free graph covering Great-Sun Foods' past earnings, revenue and cash flow.

What Does the ROCE Trend For Great-Sun Foods Tell Us?

On the surface, the trend of ROCE at Great-Sun Foods doesn't inspire confidence. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 2.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Great-Sun Foods' current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Great-Sun Foods' ROCE

Bringing it all together, while we're somewhat encouraged by Great-Sun Foods' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Great-Sun Foods (including 3 which shouldn't be ignored) .

While Great-Sun 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.