Here's What's Concerning About Zhengzhou Qianweiyangchu Food's (SZSE:001215) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 Zhengzhou Qianweiyangchu Food (SZSE:001215) 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 Zhengzhou Qianweiyangchu Food:

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

0.087 = CN¥166m ÷ (CN¥2.1b - CN¥235m) (Based on the trailing twelve months to March 2024).

Therefore, Zhengzhou Qianweiyangchu Food has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Food industry average of 7.5%.

View our latest analysis for Zhengzhou Qianweiyangchu Food

Above you can see how the current ROCE for Zhengzhou Qianweiyangchu Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhengzhou Qianweiyangchu Food for free.

What Does the ROCE Trend For Zhengzhou Qianweiyangchu Food Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 322%. That being said, Zhengzhou Qianweiyangchu Food raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhengzhou Qianweiyangchu Food probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Zhengzhou Qianweiyangchu Food has decreased its current liabilities to 11% 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 On Zhengzhou Qianweiyangchu Food's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhengzhou Qianweiyangchu Food. However, despite the promising trends, the stock has fallen 63% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Zhengzhou Qianweiyangchu Food, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhengzhou Qianweiyangchu Food 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.