Returns On Capital Signal Tricky Times Ahead For Chongqing Fuling Zhacai Group (SZSE:002507)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Chongqing Fuling Zhacai Group (SZSE:002507) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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¥805m ÷ (CN¥9.2b - CN¥550m) (Based on the trailing twelve months to March 2024).

Therefore, Chongqing Fuling Zhacai Group has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.5% generated by the Food industry, it's much better.

Check out our latest analysis for Chongqing Fuling Zhacai Group

In the above chart we have measured Chongqing Fuling Zhacai Group'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 Chongqing Fuling Zhacai Group for free.

How Are Returns Trending?

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. 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'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.

In Conclusion...

In summary, Chongqing Fuling Zhacai Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might 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.

While Chongqing Fuling Zhacai Group 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.