Jiangxi Sunshine Dairy (SZSE:001318) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Jiangxi Sunshine Dairy (SZSE:001318), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Jiangxi Sunshine Dairy is:

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

0.064 = CN¥86m ÷ (CN¥1.4b - CN¥52m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangxi Sunshine Dairy has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Food industry average of 8.0%.

Check out our latest analysis for Jiangxi Sunshine Dairy

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangxi Sunshine Dairy.

What Can We Tell From Jiangxi Sunshine Dairy's ROCE Trend?

On the surface, the trend of ROCE at Jiangxi Sunshine Dairy doesn't inspire confidence. Around four years ago the returns on capital were 22%, but since then they've fallen to 6.4%. However it looks like Jiangxi Sunshine Dairy 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 side note, Jiangxi Sunshine Dairy has done well to pay down its current liabilities to 3.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Jiangxi Sunshine Dairy is reinvesting in the business, but returns have been falling. Since the stock has declined 28% over the last year, investors may not be too optimistic on this trend improving either. 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.

Like most companies, Jiangxi Sunshine Dairy does come with some risks, and we've found 1 warning sign that you should be aware of.

While Jiangxi Sunshine Dairy 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.