If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shanghai Ziyan Foods (SHSE:603057), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Ziyan Foods, this is the formula:

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

0.16 = CN¥351m ÷ (CN¥3.0b - CN¥728m) (Based on the trailing twelve months to September 2023).

So, Shanghai Ziyan Foods has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.5% it's much better.

See our latest analysis for Shanghai Ziyan Foods

Above you can see how the current ROCE for Shanghai Ziyan Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Ziyan Foods.

So How Is Shanghai Ziyan Foods' ROCE Trending?

On the surface, the trend of ROCE at Shanghai Ziyan Foods doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last four years. However it looks like Shanghai Ziyan Foods 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shanghai Ziyan Foods has decreased its current liabilities to 24% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shanghai Ziyan Foods' ROCE

To conclude, we've found that Shanghai Ziyan Foods is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Shanghai Ziyan Foods you'll probably want to know about.

While Shanghai Ziyan Foods 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.