The Return Trends At Shandong Huifa FoodstuffLtd (SHSE:603536) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Shandong Huifa FoodstuffLtd (SHSE:603536) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Shandong Huifa FoodstuffLtd is:

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

0.067 = CN¥36m ÷ (CN¥1.5b - CN¥928m) (Based on the trailing twelve months to September 2024).

Therefore, Shandong Huifa FoodstuffLtd has an ROCE of 6.7%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

See our latest analysis for Shandong Huifa FoodstuffLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Huifa FoodstuffLtd's ROCE against it's prior returns. If you're interested in investigating Shandong Huifa FoodstuffLtd's past further, check out this free graph covering Shandong Huifa FoodstuffLtd's past earnings, revenue and cash flow.

What Can We Tell From Shandong Huifa FoodstuffLtd's ROCE Trend?

We're delighted to see that Shandong Huifa FoodstuffLtd is reaping rewards from its investments and has now broken into profitability. The company now earns 6.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Shandong Huifa FoodstuffLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

To sum it up, Shandong Huifa FoodstuffLtd is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shandong Huifa FoodstuffLtd (of which 2 are significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.