There are a few key trends to look for if we want to identify the next 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. Having said that, from a first glance at Sichuan Teway Food GroupLtd (SHSE:603317) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Sichuan Teway Food GroupLtd is:

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

0.13 = CN¥594m ÷ (CN¥5.4b - CN¥980m) (Based on the trailing twelve months to September 2024).

So, Sichuan Teway Food GroupLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

Above you can see how the current ROCE for Sichuan Teway Food GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sichuan Teway Food GroupLtd for free.

What Can We Tell From Sichuan Teway Food GroupLtd's ROCE Trend?

On the surface, the trend of ROCE at Sichuan Teway Food GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Sichuan Teway Food GroupLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Sichuan Teway Food GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Sichuan Teway Food GroupLtd does have some risks though, and we've spotted 1 warning sign for Sichuan Teway Food GroupLtd that you might be interested in.

While Sichuan Teway Food GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.