Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Sunwave CommunicationsLtd (SZSE:002115) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Sunwave CommunicationsLtd, this is the formula:

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

0.045 = CN¥125m ÷ (CN¥4.7b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

So, Sunwave CommunicationsLtd has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.9% average generated by the Media industry.

View our latest analysis for Sunwave CommunicationsLtd

In the above chart we have measured Sunwave CommunicationsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sunwave CommunicationsLtd.

What Does the ROCE Trend For Sunwave CommunicationsLtd Tell Us?

There hasn't been much to report for Sunwave CommunicationsLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Sunwave CommunicationsLtd to be a multi-bagger going forward.

On a separate but related note, it's important to know that Sunwave CommunicationsLtd has a current liabilities to total assets ratio of 41%, 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 Bottom Line On Sunwave CommunicationsLtd's ROCE

In a nutshell, Sunwave CommunicationsLtd has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Sunwave CommunicationsLtd and understanding it should be part of your investment process.

While Sunwave CommunicationsLtd isn't earning the highest return, check out this free list of companies that are 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.