There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Sichuan Changhong ElectricLtd (SHSE:600839) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Sichuan Changhong ElectricLtd:

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

0.053 = CN¥1.5b ÷ (CN¥94b - CN¥66b) (Based on the trailing twelve months to September 2024).

Thus, Sichuan Changhong ElectricLtd has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Changhong ElectricLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sichuan Changhong ElectricLtd.

What The Trend Of ROCE Can Tell Us

Sichuan Changhong ElectricLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 141% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Sichuan Changhong ElectricLtd has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Sichuan Changhong ElectricLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 316% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Sichuan Changhong ElectricLtd can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for Sichuan Changhong ElectricLtd (1 doesn't sit too well with us) 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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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.