If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Chacha Food Company (SZSE:002557) looks decent, right now, so lets see what the trend of returns can tell us.
What Is 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. To calculate this metric for Chacha Food Company, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥1.0b ÷ (CN¥9.2b - CN¥2.1b) (Based on the trailing twelve months to September 2024).
Thus, Chacha Food Company has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 6.8% it's much better.
Above you can see how the current ROCE for Chacha Food Company 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 Chacha Food Company .
So How Is Chacha Food Company's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 100% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Chacha Food Company has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
To sum it up, Chacha Food Company has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 2.2% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
Chacha Food Company could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002557 on our platform quite valuable.
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.