There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Anji Foodstuff (SHSE:603696) looks quite promising in regards to its trends of return on capital.
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 Anji Foodstuff:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CN¥35m ÷ (CN¥652m - CN¥97m) (Based on the trailing twelve months to September 2023).
Therefore, Anji Foodstuff has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.9%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Anji Foodstuff has performed in the past in other metrics, you can view this free graph of Anji Foodstuff's past earnings, revenue and cash flow.
What Can We Tell From Anji Foodstuff's ROCE Trend?
We're pretty happy with how the ROCE has been trending at Anji Foodstuff. The data shows that returns on capital have increased by 37% over the trailing five years. The company is now earning CN¥0.06 per dollar of capital employed. In regards to capital employed, Anji Foodstuff appears to been achieving more with less, since the business is using 25% less capital to run its operation. Anji Foodstuff may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 15% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line On Anji Foodstuff's ROCE
From what we've seen above, Anji Foodstuff has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 15% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Anji Foodstuff, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Anji Foodstuff 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.