Capital Allocation Trends At Wens Foodstuff Group (SZSE:300498) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Wens Foodstuff Group (SZSE:300498) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Wens Foodstuff Group is:

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

0.095 = CN¥6.3b ÷ (CN¥93b - CN¥27b) (Based on the trailing twelve months to September 2024).

Thus, Wens Foodstuff Group has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.8%.

View our latest analysis for Wens Foodstuff Group

Above you can see how the current ROCE for Wens Foodstuff Group 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 Wens Foodstuff Group .

What Can We Tell From Wens Foodstuff Group's ROCE Trend?

In terms of Wens Foodstuff Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.5%. However it looks like Wens Foodstuff Group 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.

The Bottom Line On Wens Foodstuff Group's ROCE

To conclude, we've found that Wens Foodstuff Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Wens Foodstuff Group has the makings of a multi-bagger.

Wens Foodstuff Group does have some risks though, and we've spotted 1 warning sign for Wens Foodstuff Group that you might be interested in.

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.