If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Jolywood (Suzhou) SunwattLtd (SZSE:300393), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jolywood (Suzhou) SunwattLtd, this is the formula:

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

0.026 = CN¥234m ÷ (CN¥17b - CN¥7.9b) (Based on the trailing twelve months to March 2024).

Thus, Jolywood (Suzhou) SunwattLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 3.9%.

In the above chart we have measured Jolywood (Suzhou) SunwattLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jolywood (Suzhou) SunwattLtd for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jolywood (Suzhou) SunwattLtd, we didn't gain much confidence. Around five years ago the returns on capital were 3.4%, but since then they've fallen to 2.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.6%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

To conclude, we've found that Jolywood (Suzhou) SunwattLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 3 warning signs for Jolywood (Suzhou) SunwattLtd that we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com