If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Sunriver CultureLtd (SHSE:600576) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Zhejiang Sunriver CultureLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = CN¥154m ÷ (CN¥3.7b - CN¥501m) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Sunriver CultureLtd has an ROCE of 4.8%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 3.8%.
See our latest analysis for Zhejiang Sunriver CultureLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Sunriver CultureLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Sunriver CultureLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Zhejiang Sunriver CultureLtd Tell Us?
There are better returns on capital out there than what we're seeing at Zhejiang Sunriver CultureLtd. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 61% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
Long story short, while Zhejiang Sunriver CultureLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 78% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we've found 1 warning sign for Zhejiang Sunriver CultureLtd that we think you should be aware of.
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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