What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of YanKer shop FoodLtd (SZSE:002847) we really liked what we saw.
Understanding 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)
0.35 = CN¥498m ÷ (CN¥2.7b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, YanKer shop FoodLtd has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 7.5% earned by companies in a similar industry.
View our latest analysis for YanKer shop FoodLtd
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'd like, you can check out the forecasts from the analysts covering YanKer shop FoodLtd here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at YanKer shop FoodLtd. The data shows that returns on capital have increased substantially over the last five years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 120%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, YanKer shop FoodLtd's current liabilities are still rather high at 48% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
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. Since the stock has returned a staggering 436% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to know some of the risks facing YanKer shop FoodLtd we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
