What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Shandong Homey Aquatic DevelopmentLtd (SHSE:600467) and its ROCE trend, we weren't exactly thrilled.
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 Homey Aquatic DevelopmentLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥158m ÷ (CN¥7.2b - CN¥3.3b) (Based on the trailing twelve months to March 2023).
Thus, Shandong Homey Aquatic DevelopmentLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.2%.
View our latest analysis for Shandong Homey Aquatic DevelopmentLtd
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 want to delve into the historical earnings, revenue and cash flow of Shandong Homey Aquatic DevelopmentLtd, check out these free graphs here.
What Does the ROCE Trend For Shandong Homey Aquatic DevelopmentLtd Tell Us?
Over the past five years, Shandong Homey Aquatic DevelopmentLtd's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Shandong Homey Aquatic DevelopmentLtd doesn't end up being a multi-bagger in a few years time.
On a separate but related note, it's important to know that Shandong Homey Aquatic DevelopmentLtd has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, Shandong Homey Aquatic DevelopmentLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Shandong Homey Aquatic DevelopmentLtd, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.