China Feihe (HKG:6186) Knows How To Allocate Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of China Feihe (HKG:6186) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on China Feihe is:

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

0.33 = CN¥6.9b ÷ (CN¥28b - CN¥7.1b) (Based on the trailing twelve months to December 2020).

Therefore, China Feihe has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Food industry average of 13%.

See our latest analysis for China Feihe

In the above chart we have measured China Feihe's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at China Feihe are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 698%. So we're very much inspired by what we're seeing at China Feihe thanks to its ability to profitably reinvest capital.

One more thing to note, China Feihe has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that China Feihe has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From China Feihe's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Feihe has. Since the stock has only returned 1.9% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 3 warning signs for China Feihe you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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