Returns Are Gaining Momentum At Pengdu Agriculture & Animal HusbandryLtd (SZSE:002505)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Pengdu Agriculture & Animal HusbandryLtd's (SZSE:002505) returns on capital, so let's have a look.

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

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. The formula for this calculation on Pengdu Agriculture & Animal HusbandryLtd is:

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

0.024 = CN¥221m ÷ (CN¥18b - CN¥8.6b) (Based on the trailing twelve months to September 2023).

Therefore, Pengdu Agriculture & Animal HusbandryLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

Check out our latest analysis for Pengdu Agriculture & Animal HusbandryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pengdu Agriculture & Animal HusbandryLtd.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 221% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Pengdu Agriculture & Animal HusbandryLtd's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Pengdu Agriculture & Animal HusbandryLtd's ROCE

To sum it up, Pengdu Agriculture & Animal HusbandryLtd is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 45% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Pengdu Agriculture & Animal HusbandryLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002505 helps visualize whether it is currently trading for a fair price.

While Pengdu Agriculture & Animal HusbandryLtd 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.