Returns On Capital At Chongqing Fuling Zhacai Group (SZSE:002507) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chongqing Fuling Zhacai Group (SZSE:002507) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Chongqing Fuling Zhacai Group:

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

0.093 = CN¥803m ÷ (CN¥9.2b - CN¥550m) (Based on the trailing twelve months to March 2024).

Thus, Chongqing Fuling Zhacai Group has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.6% generated by the Food industry, it's much better.

View our latest analysis for Chongqing Fuling Zhacai Group

Above you can see how the current ROCE for Chongqing Fuling Zhacai Group 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 Chongqing Fuling Zhacai Group for free.

The Trend Of ROCE

When we looked at the ROCE trend at Chongqing Fuling Zhacai Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Chongqing Fuling Zhacai Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% 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.

If you want to continue researching Chongqing Fuling Zhacai Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.