Ganyuan Foods (SZSE:002991) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Ganyuan Foods (SZSE:002991), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Ganyuan Foods:

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

0.20 = CN¥369m ÷ (CN¥2.1b - CN¥255m) (Based on the trailing twelve months to March 2024).

Thus, Ganyuan Foods has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 7.6% earned by companies in a similar industry.

See our latest analysis for Ganyuan Foods

Above you can see how the current ROCE for Ganyuan Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ganyuan Foods .

How Are Returns Trending?

On the surface, the trend of ROCE at Ganyuan Foods doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 31%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ganyuan Foods has done well to pay down its current liabilities to 12% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Ganyuan Foods' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ganyuan Foods. These trends are starting to be recognized by investors since the stock has delivered a 4.7% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Ganyuan Foods does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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