Stock Analysis

Labixiaoxin Snacks Group (HKG:1262) Is Experiencing Growth In Returns On Capital

SEHK:1262
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Labixiaoxin Snacks Group (HKG:1262) so let's look a bit deeper.

What Is 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. Analysts use this formula to calculate it for Labixiaoxin Snacks Group:

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

0.079 = CN¥33m ÷ (CN¥1.1b - CN¥697m) (Based on the trailing twelve months to June 2022).

Thus, Labixiaoxin Snacks Group has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Food industry average of 9.1%.

Check out our latest analysis for Labixiaoxin Snacks Group

roce
SEHK:1262 Return on Capital Employed February 1st 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Labixiaoxin Snacks Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Labixiaoxin Snacks Group's ROCE Trend?

It's great to see that Labixiaoxin Snacks Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 7.9% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 69% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 63% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Labixiaoxin Snacks Group's ROCE

From what we've seen above, Labixiaoxin Snacks Group has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 23% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Labixiaoxin Snacks Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Labixiaoxin Snacks Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.