China Mengniu Dairy (HKG:2319) Has Some Way To Go To Become A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China Mengniu Dairy (HKG:2319) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on China Mengniu Dairy is:

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

0.052 = CN¥4.0b ÷ (CN¥105b - CN¥30b) (Based on the trailing twelve months to June 2022).

Thus, China Mengniu Dairy has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.1%.

View our latest analysis for China Mengniu Dairy

In the above chart we have measured China Mengniu Dairy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Mengniu Dairy here for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at China Mengniu Dairy. The company has employed 96% more capital in the last five years, and the returns on that capital have remained stable at 5.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, China Mengniu Dairy has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for China Mengniu Dairy (of which 1 is concerning!) that you should know about.

While China Mengniu Dairy 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.