If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sichuan Chuanhuan TechnologyLtd (SZSE:300547) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sichuan Chuanhuan TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = CN¥207m ÷ (CN¥1.4b - CN¥262m) (Based on the trailing twelve months to September 2024).
So, Sichuan Chuanhuan TechnologyLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.
Above you can see how the current ROCE for Sichuan Chuanhuan TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sichuan Chuanhuan TechnologyLtd .
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Sichuan Chuanhuan TechnologyLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 46%. So we're very much inspired by what we're seeing at Sichuan Chuanhuan TechnologyLtd thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that Sichuan Chuanhuan TechnologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 118% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Sichuan Chuanhuan TechnologyLtd can keep these trends up, it could have a bright future ahead.
On a final note, we've found 3 warning signs for Sichuan Chuanhuan TechnologyLtd that we think 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.
