Shandong Homey Aquatic DevelopmentLtd (SHSE:600467) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shandong Homey Aquatic DevelopmentLtd (SHSE:600467), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shandong Homey Aquatic DevelopmentLtd:

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

0.031 = CN¥128m ÷ (CN¥6.9b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Thus, Shandong Homey Aquatic DevelopmentLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

View our latest analysis for Shandong Homey Aquatic DevelopmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Homey Aquatic DevelopmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shandong Homey Aquatic DevelopmentLtd.

The Trend Of ROCE

When we looked at the ROCE trend at Shandong Homey Aquatic DevelopmentLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 4.5% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shandong Homey Aquatic DevelopmentLtd's current liabilities are still rather high at 41% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Shandong Homey Aquatic DevelopmentLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shandong Homey Aquatic DevelopmentLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 12% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shandong Homey Aquatic DevelopmentLtd (of which 2 are potentially serious!) that you should 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.