If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Sublime China Information (SZSE:301299) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Sublime China Information:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥50m ÷ (CN¥898m - CN¥241m) (Based on the trailing twelve months to September 2024).
Thus, Sublime China Information has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 6.1% generated by the Professional Services industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sublime China Information's ROCE against it's prior returns. If you'd like to look at how Sublime China Information has performed in the past in other metrics, you can view this free graph of Sublime China Information's past earnings, revenue and cash flow.
So How Is Sublime China Information's ROCE Trending?
On the surface, the trend of ROCE at Sublime China Information doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Sublime China Information has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Sublime China Information's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Sublime China Information has the makings of a multi-bagger.
Sublime China Information does have some risks though, and we've spotted 2 warning signs for Sublime China Information that you might be interested in.
While Sublime China Information may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
