Returns On Capital Signal Tricky Times Ahead For Juewei Food (SHSE:603517)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Juewei Food (SHSE:603517), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Juewei Food, this is the formula:

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

0.10 = CN¥760m ÷ (CN¥9.4b - CN¥2.2b) (Based on the trailing twelve months to March 2024).

Thus, Juewei Food has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

View our latest analysis for Juewei Food

In the above chart we have measured Juewei 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 Juewei Food .

What Can We Tell From Juewei Food's ROCE Trend?

On the surface, the trend of ROCE at Juewei Food doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. However it looks like Juewei 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'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.

In Conclusion...

In summary, Juewei Food is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 48% 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 Juewei Food has the makings of a multi-bagger.

Like most companies, Juewei Food does come with some risks, and we've found 1 warning sign that you should be aware of.

While Juewei Food may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.