Returns At China Modern Dairy Holdings (HKG:1117) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Modern Dairy Holdings' (HKG:1117) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for China Modern Dairy Holdings, this is the formula:

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

0.12 = CN¥2.2b ÷ (CN¥25b - CN¥6.6b) (Based on the trailing twelve months to June 2022).

So, China Modern Dairy Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.1% it's much better.

Check out our latest analysis for China Modern Dairy Holdings

In the above chart we have measured China Modern Dairy Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Modern Dairy Holdings.

What Can We Tell From China Modern Dairy Holdings' ROCE Trend?

China Modern Dairy Holdings is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 87% more capital is being employed now too. So we're very much inspired by what we're seeing at China Modern Dairy Holdings thanks to its ability to profitably reinvest capital.

One more thing to note, China Modern Dairy Holdings has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that China Modern Dairy Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To sum it up, China Modern Dairy Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 28% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing China Modern Dairy Holdings we've found 5 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While China Modern Dairy Holdings 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.