Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Sundiro Holding (SZSE:000571) looks quite promising in regards to its trends of return on capital.

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 Sundiro Holding:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.015 = CN¥23m ÷ (CN¥2.7b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Sundiro Holding has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sundiro Holding's ROCE against it's prior returns. If you'd like to look at how Sundiro Holding has performed in the past in other metrics, you can view this free graph of Sundiro Holding's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Sundiro Holding is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Sundiro Holding is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Sundiro Holding has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Sundiro Holding's ROCE

In a nutshell, we're pleased to see that Sundiro Holding has been able to generate higher returns from less capital. Since the stock has returned a solid 98% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Sundiro Holding you'll probably want to know about.

While Sundiro Holding 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.