What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in China Youran Dairy Group's (HKG:9858) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 China Youran Dairy Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥4.3b ÷ (CN¥44b - CN¥21b) (Based on the trailing twelve months to December 2024).
Therefore, China Youran Dairy Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.5% it's much better.
View our latest analysis for China Youran Dairy Group
In the above chart we have measured China Youran Dairy Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Youran Dairy Group .
The Trend Of ROCE
The trends we've noticed at China Youran Dairy Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 220%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 48% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
What We Can Learn From China Youran Dairy Group's ROCE
All in all, it's terrific to see that China Youran Dairy Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 28% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
On a separate note, we've found 1 warning sign for China Youran Dairy Group you'll probably want to know about.
While China Youran Dairy Group 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.