What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Sichuan Guangan Aaa PublicLtd (SHSE:600979) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Sichuan Guangan Aaa PublicLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = CN¥297m ÷ (CN¥11b - CN¥1.9b) (Based on the trailing twelve months to September 2023).
Thus, Sichuan Guangan Aaa PublicLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.3%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sichuan Guangan Aaa PublicLtd has performed in the past in other metrics, you can view this free graph of Sichuan Guangan Aaa PublicLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Sichuan Guangan Aaa PublicLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.8% over the last five years. 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.
The Bottom Line On Sichuan Guangan Aaa PublicLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Sichuan Guangan Aaa PublicLtd's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Sichuan Guangan Aaa PublicLtd does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) 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.
