Shenzhen Agricultural Power GroupLtd (SZSE:000061) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Shenzhen Agricultural Power GroupLtd's (SZSE:000061) returns on capital, so let's have a look.

Understanding 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 Shenzhen Agricultural Power GroupLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.063 = CN¥753m ÷ (CN¥21b - CN¥8.6b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Agricultural Power GroupLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

View our latest analysis for Shenzhen Agricultural Power GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Agricultural Power GroupLtd's ROCE against it's prior returns. If you'd like to look at how Shenzhen Agricultural Power GroupLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Agricultural Power GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Agricultural Power GroupLtd's ROCE Trend?

Shenzhen Agricultural Power GroupLtd's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 39% over the last five years. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Shenzhen Agricultural Power GroupLtd's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shenzhen Agricultural Power GroupLtd's ROCE

In summary, we're delighted to see that Shenzhen Agricultural Power GroupLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.

On a final note, we found 2 warning signs for Shenzhen Agricultural Power GroupLtd (1 shouldn't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.