Here's What's Concerning About Suzhou Weizhixiang Food's (SHSE:605089) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Suzhou Weizhixiang Food (SHSE:605089), 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. To calculate this metric for Suzhou Weizhixiang Food, this is the formula:

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

0.072 = CN¥87m ÷ (CN¥1.3b - CN¥95m) (Based on the trailing twelve months to September 2024).

So, Suzhou Weizhixiang Food has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

Check out our latest analysis for Suzhou Weizhixiang Food

Above you can see how the current ROCE for Suzhou Weizhixiang Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Weizhixiang Food .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Suzhou Weizhixiang Food, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 7.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Suzhou Weizhixiang Food's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Suzhou Weizhixiang Food that we think you should be aware of.

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.