Investors Could Be Concerned With Great-Sun Foods' (SHSE:603336) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Great-Sun Foods (SHSE:603336), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Great-Sun Foods is:

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

0.025 = CN¥35m ÷ (CN¥1.9b - CN¥452m) (Based on the trailing twelve months to March 2024).

Therefore, Great-Sun Foods has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

View 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.

The Trend Of ROCE

In terms of Great-Sun Foods' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 2.5%. 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 24% 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.

The Bottom Line 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. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Great-Sun Foods (of which 2 are concerning!) that you should know about.

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.