Be Wary Of Zhejiang Yiming Food (SHSE:605179) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Zhejiang Yiming Food (SHSE:605179) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Zhejiang Yiming Food:

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

0.047 = CN¥62m ÷ (CN¥2.8b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Yiming Food has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

See our latest analysis for Zhejiang Yiming Food

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Yiming Food's ROCE against it's prior returns. If you'd like to look at how Zhejiang Yiming Food has performed in the past in other metrics, you can view this free graph of Zhejiang Yiming Food's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Zhejiang Yiming Food doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Zhejiang Yiming 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.

On a separate but related note, it's important to know that Zhejiang Yiming Food has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Zhejiang Yiming Food's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 62% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Zhejiang Yiming Food and understanding them should be part of your investment process.

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.