Be Wary Of Namchow Food Group (Shanghai) (SHSE:605339) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Namchow Food Group (Shanghai) (SHSE:605339) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Namchow Food Group (Shanghai):

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

0.068 = CN¥234m ÷ (CN¥4.2b - CN¥760m) (Based on the trailing twelve months to September 2024).

Therefore, Namchow Food Group (Shanghai) has an ROCE of 6.8%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

View our latest analysis for Namchow Food Group (Shanghai)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Namchow Food Group (Shanghai)'s ROCE against it's prior returns. If you're interested in investigating Namchow Food Group (Shanghai)'s past further, check out this free graph covering Namchow Food Group (Shanghai)'s past earnings, revenue and cash flow.

So How Is Namchow Food Group (Shanghai)'s ROCE Trending?

When we looked at the ROCE trend at Namchow Food Group (Shanghai), we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 6.8%. However it looks like Namchow Food Group (Shanghai) 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 related note, Namchow Food Group (Shanghai) has decreased its current liabilities to 18% 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 Bottom Line

In summary, Namchow Food Group (Shanghai) 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 54% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Namchow Food Group (Shanghai) we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.