To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, the ROCE of YanKer shop FoodLtd (SZSE:002847) looks great, so lets see what the trend can tell us.

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 YanKer shop FoodLtd:

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

0.37 = CN¥619m ÷ (CN¥3.1b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Thus, YanKer shop FoodLtd has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Food industry average of 7.6%.

Above you can see how the current ROCE for YanKer shop FoodLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for YanKer shop FoodLtd .

What Does the ROCE Trend For YanKer shop FoodLtd Tell Us?

We like the trends that we're seeing from YanKer shop FoodLtd. The data shows that returns on capital have increased substantially over the last five years to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 145% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that YanKer shop FoodLtd has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what YanKer shop FoodLtd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if YanKer shop FoodLtd can keep these trends up, it could have a bright future ahead.

YanKer shop FoodLtd does have some risks though, and we've spotted 1 warning sign for YanKer shop FoodLtd that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.

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