The Return Trends At ShanDongDenghai SeedsLtd (SZSE:002041) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at ShanDongDenghai SeedsLtd (SZSE:002041) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on ShanDongDenghai SeedsLtd is:

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

0.04 = CN¥158m ÷ (CN¥4.7b - CN¥698m) (Based on the trailing twelve months to March 2024).

Therefore, ShanDongDenghai SeedsLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

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 .

How Are Returns Trending?

ShanDongDenghai SeedsLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, ShanDongDenghai SeedsLtd is utilizing 24% 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 Key Takeaway

In summary, it's great to see that ShanDongDenghai SeedsLtd has managed to break into profitability and is continuing to reinvest in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing ShanDongDenghai SeedsLtd, we've discovered 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.

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