If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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).

Therefore, 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 5.4%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhongnongfa Seed Industry Group.

What Does the ROCE Trend For Zhongnongfa Seed Industry Group Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.0%. The amount of capital employed has increased too, by 55%. So we're very much inspired by what we're seeing at Zhongnongfa Seed Industry Group thanks to its ability to profitably reinvest capital.

The Bottom Line On Zhongnongfa Seed Industry Group's ROCE

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 2 warning signs that you should be aware of.

While Zhongnongfa Seed Industry Group 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.