If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai Sunglow Packaging TechnologyLtd (SHSE:603499), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shanghai Sunglow Packaging TechnologyLtd is:

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

0.03 = CN¥27m ÷ (CN¥1.2b - CN¥336m) (Based on the trailing twelve months to March 2024).

So, Shanghai Sunglow Packaging TechnologyLtd has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Sunglow Packaging TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Shanghai Sunglow Packaging TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shanghai Sunglow Packaging TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Sunglow Packaging TechnologyLtd Tell Us?

In terms of Shanghai Sunglow Packaging TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 6.2% five years ago. However it looks like Shanghai Sunglow Packaging TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Shanghai Sunglow Packaging TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Sunglow Packaging TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 5 warning signs with Shanghai Sunglow Packaging TechnologyLtd (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

While Shanghai Sunglow Packaging TechnologyLtd 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.