The Return Trends At Winall Hi-tech Seed (SZSE:300087) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Winall Hi-tech Seed (SZSE:300087) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Winall Hi-tech Seed, this is the formula:

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

0.09 = CN¥300m ÷ (CN¥6.2b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Thus, Winall Hi-tech Seed has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Food industry average of 7.6%.

View our latest analysis for Winall Hi-tech Seed

In the above chart we have measured Winall Hi-tech Seed'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 Winall Hi-tech Seed .

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.0%. The amount of capital employed has increased too, by 219%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Winall Hi-tech Seed's ROCE

To sum it up, Winall Hi-tech Seed has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Winall Hi-tech Seed can keep these trends up, it could have a bright future ahead.

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

While Winall Hi-tech Seed isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.