There Are Reasons To Feel Uneasy About Ausnutria Dairy's (HKG:1717) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Ausnutria Dairy (HKG:1717), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ausnutria Dairy is:

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

0.069 = CN¥422m ÷ (CN¥11b - CN¥4.5b) (Based on the trailing twelve months to June 2023).

Thus, Ausnutria Dairy has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Food industry average of 9.3%.

Check out our latest analysis for Ausnutria Dairy

Above you can see how the current ROCE for Ausnutria Dairy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ausnutria Dairy .

What Can We Tell From Ausnutria Dairy's ROCE Trend?

When we looked at the ROCE trend at Ausnutria Dairy, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 6.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ausnutria Dairy has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

To conclude, we've found that Ausnutria Dairy is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 73% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Ausnutria Dairy has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Ausnutria Dairy (of which 1 can't be ignored!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.