If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 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 China Modern Dairy Holdings, this is the formula:

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%. In absolute terms, that's a low return but it's around the Food industry average of 7.4%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for China Modern Dairy Holdings .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at China Modern Dairy Holdings. The company has employed 126% more capital in the last five years, and the returns on that capital have remained stable at 8.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From China Modern Dairy Holdings' ROCE

Long story short, while China Modern Dairy Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 22% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching China Modern Dairy Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

While China Modern Dairy Holdings 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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