To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Skyworth Group's (HKG:751) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Skyworth Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = CN¥547m ÷ (CN¥10b - CN¥3.9b) (Based on the trailing twelve months to September 2023).
Thus, Skyworth Group has an ROCE of 8.6%. On its own, that's a low figure but it's around the 7.7% average generated by the Consumer Durables industry.
Check out our latest analysis for Skyworth Group
Above you can see how the current ROCE for Skyworth 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 Skyworth Group here for free.
So How Is Skyworth Group's ROCE Trending?
Skyworth Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 303%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Skyworth Group appears to been achieving more with less, since the business is using 72% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
From what we've seen above, Skyworth Group has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 83% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Skyworth Group can keep these trends up, it could have a bright future ahead.
While Skyworth Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 751 is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.