To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Jiahe Foods Industry (SHSE:605300) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Jiahe Foods Industry, this is the formula:

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

0.13 = CN¥298m ÷ (CN¥3.2b - CN¥889m) (Based on the trailing twelve months to December 2023).

So, Jiahe Foods Industry has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.5% it's much better.

Above you can see how the current ROCE for Jiahe Foods Industry 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 analyst report for Jiahe Foods Industry .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Jiahe Foods Industry's ROCE has reduced by 35% over the last five years, while the business employed 152% more capital. Usually this isn't ideal, but given Jiahe Foods Industry conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Jiahe Foods Industry probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Jiahe Foods Industry's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiahe Foods Industry. And there could be an opportunity here if other metrics look good too, because the stock has declined 43% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Jiahe Foods Industry that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.