To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Dalian Sunasia Tourism HoldingLTD's (SHSE:600593) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Dalian Sunasia Tourism HoldingLTD is:

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

0.11 = CN¥138m ÷ (CN¥2.2b - CN¥922m) (Based on the trailing twelve months to September 2023).

So, Dalian Sunasia Tourism HoldingLTD has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.4% it's much better.

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're interested in investigating Dalian Sunasia Tourism HoldingLTD's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dalian Sunasia Tourism HoldingLTD Tell Us?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 25% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Dalian Sunasia Tourism HoldingLTD has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Dalian Sunasia Tourism HoldingLTD has a current liabilities to total assets ratio of 43%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

The main thing to remember is that Dalian Sunasia Tourism HoldingLTD has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 40% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Dalian Sunasia Tourism HoldingLTD (of which 1 can't be ignored!) that you should know about.

While Dalian Sunasia Tourism HoldingLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.