Labixiaoxin Snacks Group (HKG:1262) Shareholders Will Want The ROCE Trajectory To Continue

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.17 = CN¥71m ÷ (CN¥1.3b - CN¥872m) (Based on the trailing twelve months to December 2021).

So, Labixiaoxin Snacks Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.8% it's much better.

See our latest analysis for Labixiaoxin Snacks Group

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 want to delve into the historical earnings, revenue and cash flow of Labixiaoxin Snacks Group, check out these free graphs here.

What Does the ROCE Trend For Labixiaoxin Snacks Group Tell Us?

Like most people, we're pleased that Labixiaoxin Snacks Group is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 17% on their capital employed. 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 68% 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.

What We Can Learn From Labixiaoxin Snacks Group's ROCE

In the end, Labixiaoxin Snacks Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. 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.

One more thing, we've spotted 2 warning signs facing Labixiaoxin Snacks Group that you might find interesting.

While Labixiaoxin Snacks Group 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.