Stock Analysis

China Shenshan Orchard Holdings' (SGX:BKV) Returns On Capital Are Heading Higher

SGX:BKV
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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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at China Shenshan Orchard Holdings (SGX:BKV) and its trend of ROCE, we really liked what we saw.

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 China Shenshan Orchard Holdings, this is the formula:

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

0.016 = CN¥20m ÷ (CN¥1.3b - CN¥30m) (Based on the trailing twelve months to December 2022).

So, China Shenshan Orchard Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

See our latest analysis for China Shenshan Orchard Holdings

roce
SGX:BKV Return on Capital Employed April 14th 2023

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're interested in investigating China Shenshan Orchard Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

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

Shareholders will be relieved that China Shenshan Orchard Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.6% on its capital. While returns have increased, the amount of capital employed by China Shenshan Orchard Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a related note, the company's ratio of current liabilities to total assets has decreased to 2.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, we're delighted to see that China Shenshan Orchard Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 25% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for China Shenshan Orchard Holdings (of which 2 are concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether China Shenshan Orchard Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.