If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Zhongyin Babi Food (SHSE:605338), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Zhongyin Babi Food is:

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

0.092 = CN¥216m ÷ (CN¥2.8b - CN¥465m) (Based on the trailing twelve months to September 2024).

So, Zhongyin Babi Food has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.8%.

Above you can see how the current ROCE for Zhongyin Babi Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhongyin Babi Food for free.

The Trend Of ROCE

In terms of Zhongyin Babi Food's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.2% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Zhongyin Babi Food's ROCE

To conclude, we've found that Zhongyin Babi Food is reinvesting in the business, but returns have been falling. Since the stock has declined 41% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Zhongyin Babi Food that you might find interesting.

While Zhongyin Babi Food isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.