If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Sailun Group (SHSE:601058) looks great, so lets see what the trend can tell us.

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 Sailun Group, this is the formula:

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

0.22 = CN¥4.7b ÷ (CN¥35b - CN¥14b) (Based on the trailing twelve months to March 2024).

Therefore, Sailun Group has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.

Above you can see how the current ROCE for Sailun Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sailun Group for free.

What The Trend Of ROCE Can Tell Us

Sailun Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 191%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Sailun Group has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Sailun Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sailun Group has. Since the stock has returned a staggering 293% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Sailun Group can keep these trends up, it could have a bright future ahead.

If you want to continue researching Sailun Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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