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China Shenshan Orchard Holdings (SGX:BKV) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at China Shenshan Orchard Holdings (SGX:BKV) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Shenshan Orchard Holdings is:

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

0.004 = CN¥5.2m ÷ (CN¥1.3b - CN¥17m) (Based on the trailing twelve months to December 2023).

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Thus, China Shenshan Orchard Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

See our latest analysis for China Shenshan Orchard Holdings

roce
roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Shenshan Orchard Holdings has performed in the past in other metrics, you can view this free graph of China Shenshan Orchard Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that China Shenshan Orchard Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.4% on its capital. In addition to that, China Shenshan Orchard Holdings is employing 22% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, China Shenshan Orchard Holdings has decreased current liabilities to 1.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From China Shenshan Orchard Holdings' ROCE

In summary, it's great to see that China Shenshan Orchard Holdings has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

China Shenshan Orchard Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.