If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Yihai Kerry Arawana Holdings (SZSE:300999) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yihai Kerry Arawana Holdings is:

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

0.018 = CN¥1.9b ÷ (CN¥213b - CN¥109b) (Based on the trailing twelve months to June 2024).

Therefore, Yihai Kerry Arawana Holdings has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

In the above chart we have measured Yihai Kerry Arawana Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Yihai Kerry Arawana Holdings for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Yihai Kerry Arawana Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 1.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Yihai Kerry Arawana Holdings' current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Yihai Kerry Arawana Holdings' ROCE

To conclude, we've found that Yihai Kerry Arawana Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 47% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Yihai Kerry Arawana Holdings does have some risks though, and we've spotted 1 warning sign for Yihai Kerry Arawana Holdings that you might be interested in.

While Yihai Kerry Arawana Holdings 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.