Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangsu Yanghe Distillery (SZSE:002304), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jiangsu Yanghe Distillery is:

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

0.18 = CN¥10.0b ÷ (CN¥64b - CN¥10.0b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Yanghe Distillery has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.

In the above chart we have measured Jiangsu Yanghe Distillery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Yanghe Distillery .

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangsu Yanghe Distillery doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 18%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Jiangsu Yanghe Distillery's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 10% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Jiangsu Yanghe Distillery, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Jiangsu Yanghe Distillery 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.