If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at SF Oilless Bearing Group (SZSE:300817) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SF Oilless Bearing Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = CN¥64m ÷ (CN¥1.3b - CN¥214m) (Based on the trailing twelve months to September 2023).
Therefore, SF Oilless Bearing Group has an ROCE of 6.0%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.
See our latest analysis for SF Oilless Bearing Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for SF Oilless Bearing Group's ROCE against it's prior returns. If you're interested in investigating SF Oilless Bearing Group's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of SF Oilless Bearing Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.0% from 19% five years ago. However it looks like SF Oilless Bearing Group 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.
The Key Takeaway
In summary, SF Oilless Bearing Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last three years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
SF Oilless Bearing Group does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.
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.