Shenzhen Cereals HoldingsLtd's (SZSE:000019) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shenzhen Cereals HoldingsLtd (SZSE:000019), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Cereals HoldingsLtd:

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

0.084 = CN¥417m ÷ (CN¥7.2b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

So, Shenzhen Cereals HoldingsLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.8%.

Check out our latest analysis for Shenzhen Cereals HoldingsLtd

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

What Does the ROCE Trend For Shenzhen Cereals HoldingsLtd Tell Us?

There hasn't been much to report for Shenzhen Cereals HoldingsLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Shenzhen Cereals HoldingsLtd doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 31% of total assets, this reported ROCE would probably be less than8.4% because total capital employed would be higher.The 8.4% ROCE could be even lower if current liabilities weren't 31% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On Shenzhen Cereals HoldingsLtd's ROCE

In a nutshell, Shenzhen Cereals HoldingsLtd has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Shenzhen Cereals HoldingsLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Shenzhen Cereals HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.