Be Wary Of Guangdong Yuehai Feeds GroupLtd (SZSE:001313) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Guangdong Yuehai Feeds GroupLtd (SZSE:001313) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangdong Yuehai Feeds GroupLtd, this is the formula:

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

0.033 = CN¥93m ÷ (CN¥5.7b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Yuehai Feeds GroupLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.2%.

Check out our latest analysis for Guangdong Yuehai Feeds GroupLtd

In the above chart we have measured Guangdong Yuehai Feeds GroupLtd'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 Guangdong Yuehai Feeds GroupLtd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guangdong Yuehai Feeds GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.3% from 14% five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Guangdong Yuehai Feeds GroupLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Yuehai Feeds GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 12% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Yuehai Feeds GroupLtd has the makings of a multi-bagger.

Guangdong Yuehai Feeds GroupLtd does have some risks though, and we've spotted 1 warning sign for Guangdong Yuehai Feeds GroupLtd that you might be interested in.

While Guangdong Yuehai Feeds GroupLtd 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.