To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Shenzhen Agricultural Products Group (SZSE:000061) and its trend of ROCE, we really liked what we saw.

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 Products Group, this is the formula:

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

0.047 = CN¥587m ÷ (CN¥21b - CN¥8.9b) (Based on the trailing twelve months to June 2023).

Therefore, Shenzhen Agricultural Products Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 7.8%.

View our latest analysis for Shenzhen Agricultural Products Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Agricultural Products Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shenzhen Agricultural Products Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 43% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, Shenzhen Agricultural Products Group has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Shenzhen Agricultural Products Group's ROCE

In summary, we're delighted to see that Shenzhen Agricultural Products Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 40% 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 exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Shenzhen Agricultural Products Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Shenzhen Agricultural Products Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.