Returns At ShanDongDenghai SeedsLtd (SZSE:002041) Are On The Way Up

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, ShanDongDenghai SeedsLtd (SZSE:002041) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for ShanDongDenghai SeedsLtd:

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

0.028 = CN¥110m ÷ (CN¥5.1b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, ShanDongDenghai SeedsLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

See our latest analysis for ShanDongDenghai SeedsLtd

In the above chart we have measured ShanDongDenghai SeedsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ShanDongDenghai SeedsLtd .

So How Is ShanDongDenghai SeedsLtd's ROCE Trending?

The fact that ShanDongDenghai SeedsLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.8% on its capital. And unsurprisingly, like most companies trying to break into the black, ShanDongDenghai SeedsLtd is utilizing 27% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On ShanDongDenghai SeedsLtd's ROCE

To the delight of most shareholders, ShanDongDenghai SeedsLtd has now broken into profitability. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with ShanDongDenghai SeedsLtd and understanding this should be part of your investment process.

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.

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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.