Returns On Capital Signal Tricky Times Ahead For Yihai Kerry Arawana Holdings (SZSE:300999)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Yihai Kerry Arawana Holdings (SZSE:300999) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Yihai Kerry Arawana Holdings, this is the formula:

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

0.013 = CN¥1.3b ÷ (CN¥226b - CN¥121b) (Based on the trailing twelve months to March 2024).

So, Yihai Kerry Arawana Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

Check out our latest analysis for Yihai Kerry Arawana Holdings

Above you can see how the current ROCE for Yihai Kerry Arawana Holdings 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 Yihai Kerry Arawana Holdings .

What Can We Tell From Yihai Kerry Arawana Holdings' ROCE Trend?

On the surface, the trend of ROCE at Yihai Kerry Arawana Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 9.2% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Yihai Kerry Arawana Holdings' current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Yihai Kerry Arawana Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Yihai Kerry Arawana Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last three years. 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're still interested in Yihai Kerry Arawana Holdings it's worth checking out our FREE intrinsic value approximation for 300999 to see if it's trading at an attractive price in other respects.

While Yihai Kerry Arawana Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.