Zhongnongfa Seed Industry Group (SHSE:600313) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Zhongnongfa Seed Industry Group's (SHSE:600313) returns on capital, so let's have a look.

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 Zhongnongfa Seed Industry Group is:

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

0.02 = CN¥70m ÷ (CN¥5.2b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

So, Zhongnongfa Seed Industry Group has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

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'd like to look at how Zhongnongfa Seed Industry Group has performed in the past in other metrics, you can view this free graph of Zhongnongfa Seed Industry Group's past earnings, revenue and cash flow.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.0%. The amount of capital employed has increased too, by 55%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Zhongnongfa Seed Industry Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 102% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Zhongnongfa Seed Industry Group can keep these trends up, it could have a bright future ahead.

If you want to continue researching Zhongnongfa Seed Industry Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.