To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Jiangxi Sunshine Dairy (SZSE:001318) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Jiangxi Sunshine Dairy is:

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

0.071 = CN¥100m ÷ (CN¥1.5b - CN¥59m) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Sunshine Dairy has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Sunshine Dairy's ROCE against it's prior returns. If you're interested in investigating Jiangxi Sunshine Dairy's past further, check out this free graph covering Jiangxi Sunshine Dairy's past earnings, revenue and cash flow.

What Can We Tell From Jiangxi Sunshine Dairy's ROCE Trend?

On the surface, the trend of ROCE at Jiangxi Sunshine Dairy doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 22% five years ago. However it looks like Jiangxi Sunshine Dairy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 related note, Jiangxi Sunshine Dairy has decreased its current liabilities to 4.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Jiangxi Sunshine Dairy's ROCE

In summary, Jiangxi Sunshine Dairy is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Jiangxi Sunshine Dairy you'll probably want to know about.

While Jiangxi Sunshine Dairy isn't earning the highest return, check out this free list of companies that are 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.