There's Been No Shortage Of Growth Recently For Zhongnongfa Seed Industry Group's (SHSE:600313) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Zhongnongfa Seed Industry Group (SHSE:600313) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Zhongnongfa Seed Industry Group, this is the formula:

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

0.042 = CN¥134m ÷ (CN¥5.0b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

So, Zhongnongfa Seed Industry Group has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.0%.

See our latest analysis for Zhongnongfa Seed Industry Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongnongfa Seed Industry Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhongnongfa Seed Industry Group.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Zhongnongfa Seed Industry Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.2% on its capital. Not only that, but the company is utilizing 41% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

In Conclusion...

In summary, it's great to see that Zhongnongfa Seed Industry Group has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 134% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Zhongnongfa Seed Industry Group that we think you should be aware of.

While Zhongnongfa Seed Industry Group 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.

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.