If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. 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 Shenzhen Agricultural Power GroupLtd's (SZSE:000061) returns on capital, so let's have a look.

Understanding 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 Shenzhen Agricultural Power GroupLtd, this is the formula:

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

0.061 = CN¥738m ÷ (CN¥21b - CN¥8.5b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Agricultural Power GroupLtd has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Agricultural Power GroupLtd's ROCE against it's prior returns. If you'd like to look at how Shenzhen Agricultural Power GroupLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Agricultural Power GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Agricultural Power GroupLtd's ROCE Trend?

Shenzhen Agricultural Power GroupLtd's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 82% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, Shenzhen Agricultural Power GroupLtd's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To bring it all together, Shenzhen Agricultural Power GroupLtd has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 2.1% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you'd like to know more about Shenzhen Agricultural Power GroupLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Shenzhen Agricultural Power GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com