If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Yihai Kerry Arawana Holdings (SZSE:300999) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Yihai Kerry Arawana Holdings is:

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

0.019 = CN¥2.1b ÷ (CN¥239b - CN¥129b) (Based on the trailing twelve months to September 2023).

So, Yihai Kerry Arawana Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.

Check out our latest analysis for Yihai Kerry Arawana Holdings

Above you can see how the current ROCE for Yihai Kerry Arawana Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yihai Kerry Arawana Holdings.

What Can We Tell From Yihai Kerry Arawana Holdings' ROCE Trend?

On the surface, the trend of ROCE at Yihai Kerry Arawana Holdings doesn't inspire confidence. Around five years ago the returns on capital were 8.5%, but since then they've fallen to 1.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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, Yihai Kerry Arawana Holdings' current liabilities are still rather high at 54% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Yihai Kerry Arawana Holdings' ROCE

In summary, Yihai Kerry Arawana Holdings 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 51% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Yihai Kerry Arawana Holdings has the makings of a multi-bagger.

Yihai Kerry Arawana Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.