ShanDongDenghai SeedsLtd (SZSE:002041) Is Experiencing Growth In Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at ShanDongDenghai SeedsLtd (SZSE:002041) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 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).

Therefore, ShanDongDenghai SeedsLtd has an ROCE of 2.8%. Ultimately, that's a low return and it 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're interested, you can view the analysts predictions in our free analyst report for ShanDongDenghai SeedsLtd .

What Does the ROCE Trend For ShanDongDenghai SeedsLtd Tell Us?

We're delighted to see that ShanDongDenghai SeedsLtd is reaping rewards from its investments and is now generating some pre-tax profits. 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. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On ShanDongDenghai SeedsLtd's ROCE

Overall, ShanDongDenghai SeedsLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 33% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, ShanDongDenghai SeedsLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While ShanDongDenghai SeedsLtd 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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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.