Angel Yeast (SHSE:600298) will be looking to reverse its return trends

What early trends should we look for to identify a stock that could multiply in value over the long term? Ideally, a company exhibits two trends; firstly, a growing one return on capital employed (ROCE) and secondly an increase Crowd of the capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the company and generating higher returns. However, after a quick look at the numbers, we think not Angel yeast (SHSE:600298) has the makings of a multi-bagger for the future, but let’s take a look at why that might be.

What is Return on Capital Employed (ROCE)?

For those who are unsure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Angel Yeast:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.099 = CN¥1.4 billion ÷ (CN¥20 billion – CN¥6.6 billion) (Based on the last twelve months ended June 2024).

Therefore, Angel Yeast has a ROCE of 9.9%. That’s a small return on its own, but compared to the food industry’s average of 7.2%, it’s much better.

Check out our latest analysis for Angel Yeast

Above you can see how Angel Yeast’s current ROCE compares to its past returns on capital, but there’s only so much you can tell from past history. If you want, you can check out analyst forecasts for Angel Yeast free.

The trend of ROCE

In terms of Angel Yeast’s historical ROCE movements, the trend is not fantastic. Over the last five years, the return on capital has fallen to 9.9% from 16% five years ago. However, it looks like Angel Yeast is reinvesting in long-term growth, because although capital employed has increased, the company’s sales have not changed significantly over the last 12 months. From now on, it’s worth keeping an eye on the company’s earnings to see if these investments are actually contributing to the bottom line.

What we can learn from Angel Yeast’s ROCE

In summary, Angel Yeast is reinvesting funds into the company to achieve growth, but unfortunately it looks like sales haven’t increased much yet. With the stock up an impressive 44% over the last five years, investors have to assume there’s even better things to come. But if the evolution of these underlying trends continues, the likelihood of it becoming a multi-bagger from now on is not high, in our opinion.

One final note: you should read up on this 2 warning signs We spotted Angel Yeast (including 1, which is a bit worrying).

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.