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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sanwei Holding GroupLtd (SHSE:603033) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sanwei Holding GroupLtd, this is the formula:

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

0.039 = CN¥246m ÷ (CN¥11b - CN¥4.8b) (Based on the trailing twelve months to June 2024).

Thus, Sanwei Holding GroupLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

In the above chart we have measured Sanwei Holding GroupLtd'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 Sanwei Holding GroupLtd for free.

So How Is Sanwei Holding GroupLtd's ROCE Trending?

When we looked at the ROCE trend at Sanwei Holding GroupLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Sanwei Holding GroupLtd's current liabilities have increased over the last five years to 43% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.9%. 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

In summary, despite lower returns in the short term, we're encouraged to see that Sanwei Holding GroupLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 98% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Sanwei Holding GroupLtd, we've spotted 2 warning signs, and 1 of them is potentially serious.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.