What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, China Shenshan Orchard Holdings (SGX:BKV) looks quite promising in regards to its trends of return on capital.

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 China Shenshan Orchard Holdings, this is the formula:

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

0.011 = CN¥14m ÷ (CN¥1.3b - CN¥15m) (Based on the trailing twelve months to June 2023).

So, China Shenshan Orchard Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

See our latest analysis for China Shenshan Orchard Holdings

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that China Shenshan Orchard Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 1.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

One more thing to note, China Shenshan Orchard Holdings has decreased current liabilities to 1.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that China Shenshan Orchard Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

As discussed above, China Shenshan Orchard Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. However the stock is down a substantial 76% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we found 3 warning signs for China Shenshan Orchard Holdings (2 are concerning) you should be aware of.

While China Shenshan Orchard Holdings 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.