If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Hunan SUND Technological (SZSE:301548), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hunan SUND Technological:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CN¥112m ÷ (CN¥1.6b - CN¥184m) (Based on the trailing twelve months to June 2024).
So, Hunan SUND Technological has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.
Above you can see how the current ROCE for Hunan SUND Technological compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hunan SUND Technological .
So How Is Hunan SUND Technological's ROCE Trending?
In terms of Hunan SUND Technological's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.7% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
On a side note, Hunan SUND Technological has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Hunan SUND Technological's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 19% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Hunan SUND Technological, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Hunan SUND Technological 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.