To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at V V Food & BeverageLtd (SHSE:600300) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for V V Food & BeverageLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = CN¥322m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to June 2023).
Thus, V V Food & BeverageLtd has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 7.6% generated by the Food industry, it's much better.
View our latest analysis for V V Food & BeverageLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for V V Food & BeverageLtd's ROCE against it's prior returns. If you're interested in investigating V V Food & BeverageLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For V V Food & BeverageLtd Tell Us?
V V Food & BeverageLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 77% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that V V Food & BeverageLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On V V Food & BeverageLtd's ROCE
To sum it up, V V Food & BeverageLtd is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
On a separate note, we've found 2 warning signs for V V Food & BeverageLtd you'll probably want to know about.
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.