There Are Reasons To Feel Uneasy About Apple Flavor & Fragrance GroupLtd's (SHSE:603020) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 investigating Apple Flavor & Fragrance GroupLtd (SHSE:603020), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Apple Flavor & Fragrance GroupLtd:

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

0.028 = CN¥96m ÷ (CN¥3.8b - CN¥300m) (Based on the trailing twelve months to September 2023).

So, Apple Flavor & Fragrance GroupLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.8%.

View our latest analysis for Apple Flavor & Fragrance GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Apple Flavor & Fragrance GroupLtd's ROCE against it's prior returns. If you're interested in investigating Apple Flavor & Fragrance GroupLtd's past further, check out this free graph covering Apple Flavor & Fragrance GroupLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Apple Flavor & Fragrance GroupLtd Tell Us?

In terms of Apple Flavor & Fragrance GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 2.8%. However it looks like Apple Flavor & Fragrance GroupLtd 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Apple Flavor & Fragrance GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Apple Flavor & Fragrance GroupLtd has the makings of a multi-bagger.

If you want to know some of the risks facing Apple Flavor & Fragrance GroupLtd we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.