If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhengzhou Qianweiyangchu Food (SZSE:001215), we don't think it's current trends fit the mold of a multi-bagger.

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 Zhengzhou Qianweiyangchu Food, this is the formula:

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

0.087 = CN¥166m ÷ (CN¥2.2b - CN¥251m) (Based on the trailing twelve months to June 2024).

So, Zhengzhou Qianweiyangchu Food has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.2%.

Above you can see how the current ROCE for Zhengzhou Qianweiyangchu Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhengzhou Qianweiyangchu Food .

How Are Returns Trending?

We weren't thrilled with the trend because Zhengzhou Qianweiyangchu Food's ROCE has reduced by 53% over the last five years, while the business employed 305% more capital. That being said, Zhengzhou Qianweiyangchu Food raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhengzhou Qianweiyangchu Food's earnings and if they change as a result from the capital raise.

On a side note, Zhengzhou Qianweiyangchu Food has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

While returns have fallen for Zhengzhou Qianweiyangchu Food in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 53% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 2 warning signs facing Zhengzhou Qianweiyangchu Food that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.