If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Shandong Huifa FoodstuffLtd's (SHSE:603536) returns on capital, so let's have a look.

Understanding 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 Shandong Huifa FoodstuffLtd is:

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

0.10 = CN¥55m ÷ (CN¥1.5b - CN¥928m) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Huifa FoodstuffLtd has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 7.2% generated by the Food industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Huifa FoodstuffLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shandong Huifa FoodstuffLtd.

What Does the ROCE Trend For Shandong Huifa FoodstuffLtd Tell Us?

Shandong Huifa FoodstuffLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 10.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Shandong Huifa FoodstuffLtd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To bring it all together, Shandong Huifa FoodstuffLtd has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 26% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One final note, you should learn about the 2 warning signs we've spotted with Shandong Huifa FoodstuffLtd (including 1 which doesn't sit too well with us) .

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.