There Are Reasons To Feel Uneasy About Qingdao Richen FoodLtd's (SHSE:603755) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Qingdao Richen FoodLtd (SHSE:603755), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Qingdao Richen FoodLtd:

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

0.093 = CN¥69m ÷ (CN¥963m - CN¥216m) (Based on the trailing twelve months to June 2024).

Thus, Qingdao Richen FoodLtd has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.2%.

View our latest analysis for Qingdao Richen FoodLtd

Above you can see how the current ROCE for Qingdao Richen FoodLtd 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 Qingdao Richen FoodLtd .

So How Is Qingdao Richen FoodLtd's ROCE Trending?

When we looked at the ROCE trend at Qingdao Richen FoodLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 22%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Qingdao Richen FoodLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Qingdao Richen FoodLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 1 warning sign facing Qingdao Richen FoodLtd that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.