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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Jiangsu Yike Food GroupLtd (SZSE:301116) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Jiangsu Yike Food GroupLtd, this is the formula:

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

0.05 = CN¥141m ÷ (CN¥5.1b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Yike Food GroupLtd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

In the above chart we have measured Jiangsu Yike Food GroupLtd's 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 Jiangsu Yike Food GroupLtd for free.

So How Is Jiangsu Yike Food GroupLtd's ROCE Trending?

On the surface, the trend of ROCE at Jiangsu Yike Food GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.0% from 28% five years ago. However it looks like Jiangsu Yike Food GroupLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Jiangsu Yike Food GroupLtd has a high ratio of current liabilities to total assets of 45%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Jiangsu Yike Food GroupLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 0.8% to shareholders over the last year. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Jiangsu Yike Food GroupLtd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.