The Returns On Capital At Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhe Jiang Li Zi Yuan FoodLtd:

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

0.081 = CN¥183m ÷ (CN¥2.8b - CN¥579m) (Based on the trailing twelve months to June 2024).

Thus, Zhe Jiang Li Zi Yuan FoodLtd has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Food industry average of 7.2%.

Check out our latest analysis for Zhe Jiang Li Zi Yuan FoodLtd

In the above chart we have measured Zhe Jiang Li Zi Yuan FoodLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhe Jiang Li Zi Yuan FoodLtd for free.

What Does the ROCE Trend For Zhe Jiang Li Zi Yuan FoodLtd Tell Us?

On the surface, the trend of ROCE at Zhe Jiang Li Zi Yuan FoodLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Zhe Jiang Li Zi Yuan FoodLtd has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. 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 Bottom Line On Zhe Jiang Li Zi Yuan FoodLtd's ROCE

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. And investors appear hesitant that the trends will pick up because the stock has fallen 60% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhe Jiang Li Zi Yuan FoodLtd (of which 1 is a bit concerning!) that you should know about.

While Zhe Jiang Li Zi Yuan FoodLtd 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.