What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Namchow Food Group (Shanghai) (SHSE:605339) 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. Analysts use this formula to calculate it for Namchow Food Group (Shanghai):

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

0.031 = CN¥102m ÷ (CN¥4.2b - CN¥877m) (Based on the trailing twelve months to June 2023).

So, Namchow Food Group (Shanghai) has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.3%.

Check out our latest analysis for Namchow Food Group (Shanghai)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Namchow Food Group (Shanghai)'s ROCE against it's prior returns. If you'd like to look at how Namchow Food Group (Shanghai) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Namchow Food Group (Shanghai)'s ROCE Trending?

When we looked at the ROCE trend at Namchow Food Group (Shanghai), we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 3.1%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Namchow Food Group (Shanghai) has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Namchow Food Group (Shanghai) 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 11% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Namchow Food Group (Shanghai) does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

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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.