There Are Reasons To Feel Uneasy About Pu'er Lancang Ancient Tea's (HKG:6911) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Pu'er Lancang Ancient Tea (HKG:6911) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Pu'er Lancang Ancient Tea:

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

0.069 = CN¥81m ÷ (CN¥1.6b - CN¥457m) (Based on the trailing twelve months to June 2024).

So, Pu'er Lancang Ancient Tea has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Food industry average of 7.7%.

Check out our latest analysis for Pu'er Lancang Ancient Tea

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Pu'er Lancang Ancient Tea has performed in the past in other metrics, you can view this free graph of Pu'er Lancang Ancient Tea's past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because Pu'er Lancang Ancient Tea's ROCE has reduced by 66% over the last five years, while the business employed 144% more capital. Usually this isn't ideal, but given Pu'er Lancang Ancient Tea conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Pu'er Lancang Ancient Tea might not have received a full period of earnings contribution from it. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line

In summary, Pu'er Lancang Ancient Tea is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 41% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Pu'er Lancang Ancient Tea has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Pu'er Lancang Ancient Tea (1 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.