There's Been No Shortage Of Growth Recently For Labixiaoxin Snacks Group's (HKG:1262) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Labixiaoxin Snacks Group (HKG:1262) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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).

Therefore, 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 8.5%.

Check out our latest analysis for Labixiaoxin Snacks Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Labixiaoxin Snacks Group's ROCE against it's prior returns. If you'd like to look at how Labixiaoxin Snacks Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Labixiaoxin Snacks Group is using 69% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. 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. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Labixiaoxin Snacks Group's ROCE

In summary, it's great to see that Labixiaoxin Snacks Group has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 41% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Labixiaoxin Snacks Group does come with some risks, and we've found 2 warning signs that 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.