Returns At Guoquan Food (Shanghai) (HKG:2517) Are On The Way Up

There are a few key trends to look for if we want to identify the next 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. So on that note, Guoquan Food (Shanghai) (HKG:2517) looks quite promising in regards to its trends of return on capital.

Our free stock report includes 1 warning sign investors should be aware of before investing in Guoquan Food (Shanghai). Read for free now.

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 Guoquan Food (Shanghai), this is the formula:

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

0.11 = CN¥364m ÷ (CN¥4.8b - CN¥1.4b) (Based on the trailing twelve months to December 2024).

Thus, Guoquan Food (Shanghai) has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Consumer Retailing industry.

See our latest analysis for Guoquan Food (Shanghai)

Above you can see how the current ROCE for Guoquan Food (Shanghai) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guoquan Food (Shanghai) for free.

How Are Returns Trending?

The fact that Guoquan Food (Shanghai) is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Guoquan Food (Shanghai) is utilizing 387% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Guoquan Food (Shanghai) has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Guoquan Food (Shanghai) has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Guoquan Food (Shanghai)'s ROCE

To the delight of most shareholders, Guoquan Food (Shanghai) has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 53% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for Guoquan Food (Shanghai) that we think you should be aware of.

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.