Investors Could Be Concerned With Zhejiang Yiming Food's (SHSE:605179) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Zhejiang Yiming Food (SHSE:605179) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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).

So, 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%.

View 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

In terms of Zhejiang Yiming Food's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 4.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

Another thing to note, Zhejiang Yiming Food has a high ratio of current liabilities to total assets of 53%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Zhejiang Yiming Food's ROCE

To conclude, we've found that Zhejiang Yiming Food is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 2 warning signs for Zhejiang Yiming Food you'll probably want to 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.