Be Wary Of Jiangsu Yanghe Distillery (SZSE:002304) 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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Jiangsu Yanghe Distillery (SZSE:002304), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

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 Jiangsu Yanghe Distillery is:

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

0.23 = CN¥13b ÷ (CN¥63b - CN¥9.2b) (Based on the trailing twelve months to June 2024).

So, Jiangsu Yanghe Distillery has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Jiangsu Yanghe Distillery

In the above chart we have measured Jiangsu Yanghe Distillery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Yanghe Distillery .

How Are Returns Trending?

When we looked at the ROCE trend at Jiangsu Yanghe Distillery, we didn't gain much confidence. Historically returns on capital were even higher at 30%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Jiangsu Yanghe Distillery's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Yanghe Distillery's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 18% over the last five 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.

Jiangsu Yanghe Distillery does have some risks though, and we've spotted 1 warning sign for Jiangsu Yanghe Distillery that you might be interested in.

Jiangsu Yanghe Distillery is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.