There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Zhongnongfa Seed Industry Group (SHSE:600313) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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 5.7%.

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 Zhongnongfa Seed Industry Group's past further, check out this free graph covering Zhongnongfa Seed Industry Group's past earnings, revenue and cash flow.

So How Is Zhongnongfa Seed Industry Group's ROCE Trending?

The fact that Zhongnongfa Seed Industry Group is now generating some pre-tax profits from its prior investments is very encouraging. 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. 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.

The Bottom Line On Zhongnongfa Seed Industry Group's ROCE

To the delight of most shareholders, Zhongnongfa Seed Industry Group has now broken into profitability. Since the stock has returned a staggering 154% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

Like most companies, Zhongnongfa Seed Industry Group does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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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.