If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at China Modern Dairy Holdings (HKG:1117), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for China Modern Dairy Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥2.0b ÷ (CN¥32b - CN¥7.1b) (Based on the trailing twelve months to June 2024).
Thus, China Modern Dairy Holdings has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.
View our latest analysis for China Modern Dairy Holdings
Above you can see how the current ROCE for China Modern Dairy Holdings 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 China Modern Dairy Holdings for free.
So How Is China Modern Dairy Holdings' ROCE Trending?
In terms of China Modern Dairy Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 126% more capital in the last five years, and the returns on that capital have remained stable at 8.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
In summary, China Modern Dairy Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Modern Dairy Holdings has the makings of a multi-bagger.
China Modern Dairy Holdings does have some risks though, and we've spotted 1 warning sign for China Modern Dairy Holdings that you might be interested in.
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.