What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shandong Sino-Agri United BiotechnologyLtd (SZSE:003042) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Shandong Sino-Agri United BiotechnologyLtd:

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

0.067 = CN¥132m ÷ (CN¥3.4b - CN¥1.4b) (Based on the trailing twelve months to September 2022).

Thus, Shandong Sino-Agri United BiotechnologyLtd has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.9%.

See our latest analysis for Shandong Sino-Agri United BiotechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Sino-Agri United BiotechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Shandong Sino-Agri United BiotechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Shandong Sino-Agri United BiotechnologyLtd's ROCE Trend?

In terms of Shandong Sino-Agri United BiotechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shandong Sino-Agri United BiotechnologyLtd has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shandong Sino-Agri United BiotechnologyLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 56% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Shandong Sino-Agri United BiotechnologyLtd does have some risks though, and we've spotted 2 warning signs for Shandong Sino-Agri United BiotechnologyLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.