Suzhou Weizhixiang Food (SHSE:605089) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Suzhou Weizhixiang Food (SHSE:605089) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suzhou Weizhixiang Food is:

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

0.075 = CN¥88m ÷ (CN¥1.2b - CN¥70m) (Based on the trailing twelve months to June 2024).

So, Suzhou Weizhixiang Food has an ROCE of 7.5%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

See 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 Does the ROCE Trend For Suzhou Weizhixiang Food Tell Us?

In terms of Suzhou Weizhixiang Food's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.5% from 36% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about Suzhou Weizhixiang Food because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Suzhou Weizhixiang Food 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.