China Shenshan Orchard Holdings (SGX:BKV) Is Experiencing Growth In 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in China Shenshan Orchard Holdings' (SGX:BKV) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Shenshan Orchard Holdings, this is the formula:

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

0.004 = CN¥5.2m ÷ (CN¥1.3b - CN¥17m) (Based on the trailing twelve months to December 2023).

So, China Shenshan Orchard Holdings has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.4%.

View our latest analysis for China Shenshan Orchard Holdings

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'd like to look at how China Shenshan Orchard Holdings has performed in the past in other metrics, you can view this free graph of China Shenshan Orchard Holdings' past earnings, revenue and cash flow.

What Can We Tell From China Shenshan Orchard Holdings' ROCE Trend?

The fact that China Shenshan Orchard Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 0.4% which is a sight for sore eyes. Not only that, but the company is utilizing 22% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 1.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On China Shenshan Orchard Holdings' ROCE

Long story short, we're delighted to see that China Shenshan Orchard Holdings' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

China Shenshan Orchard Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

While China Shenshan Orchard Holdings 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.