Under The Bonnet, COFCO Joycome Foods' (HKG:1610) Returns Look Impressive

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of COFCO Joycome Foods (HKG:1610) we really liked what we saw.

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

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. Analysts use this formula to calculate it for COFCO Joycome Foods:

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

0.41 = CN¥3.8b ÷ (CN¥24b - CN¥15b) (Based on the trailing twelve months to June 2020).

Thus, COFCO Joycome Foods has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for COFCO Joycome Foods

Above you can see how the current ROCE for COFCO Joycome Foods 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 COFCO Joycome Foods here for free.

What Does the ROCE Trend For COFCO Joycome Foods Tell Us?

COFCO Joycome Foods is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 214% more capital is being employed now too. So we're very much inspired by what we're seeing at COFCO Joycome Foods thanks to its ability to profitably reinvest capital.

Another thing to note, COFCO Joycome Foods has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, COFCO Joycome Foods has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 311% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 5 warning signs we've spotted with COFCO Joycome Foods (including 3 which are a bit concerning) .

COFCO Joycome Foods is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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