There Are Reasons To Feel Uneasy About Jiangsu Lihua Animal Husbandry's (SZSE:300761) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Jiangsu Lihua Animal Husbandry (SZSE:300761), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Jiangsu Lihua Animal Husbandry, this is the formula:

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

0.11 = CN¥1.0b ÷ (CN¥15b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Lihua Animal Husbandry has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Food industry.

See our latest analysis for Jiangsu Lihua Animal Husbandry

Above you can see how the current ROCE for Jiangsu Lihua Animal Husbandry 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 Jiangsu Lihua Animal Husbandry .

What Does the ROCE Trend For Jiangsu Lihua Animal Husbandry Tell Us?

In terms of Jiangsu Lihua Animal Husbandry's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% 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.

On a side note, Jiangsu Lihua Animal Husbandry's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Jiangsu Lihua Animal Husbandry's ROCE

To conclude, we've found that Jiangsu Lihua Animal Husbandry is reinvesting in the business, but returns have been falling. Since the stock has declined 33% over the last five years, investors may not be too optimistic on this trend improving either. 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'd like to know about the risks facing Jiangsu Lihua Animal Husbandry, we've discovered 1 warning sign that you should be aware of.

While Jiangsu Lihua Animal Husbandry 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.