Be Wary Of Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Zhe Jiang Li Zi Yuan FoodLtd is:

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

0.08 = CN¥186m ÷ (CN¥2.9b - CN¥563m) (Based on the trailing twelve months to September 2024).

Thus, Zhe Jiang Li Zi Yuan FoodLtd has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Food industry average of 7.2%.

See our latest analysis for Zhe Jiang Li Zi Yuan FoodLtd

Above you can see how the current ROCE for Zhe Jiang Li Zi Yuan 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 Zhe Jiang Li Zi Yuan FoodLtd .

So How Is Zhe Jiang Li Zi Yuan FoodLtd's ROCE Trending?

In terms of Zhe Jiang Li Zi Yuan FoodLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 38% five years ago. However it looks like Zhe Jiang Li Zi Yuan FoodLtd 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhe Jiang Li Zi Yuan FoodLtd has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Zhe Jiang Li Zi Yuan FoodLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 25% over the last three years, investors may not be too optimistic on this trend improving either. 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.

One more thing to note, we've identified 2 warning signs with Zhe Jiang Li Zi Yuan FoodLtd and understanding these should be part of your investment process.

While Zhe Jiang Li Zi Yuan FoodLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.