If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Sunlight (1977) Holdings (HKG:8451) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Sunlight (1977) Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = S$1.1m ÷ (S$20m - S$1.1m) (Based on the trailing twelve months to March 2024).
Thus, Sunlight (1977) Holdings has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 13%.
View our latest analysis for Sunlight (1977) Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunlight (1977) Holdings' ROCE against it's prior returns. If you'd like to look at how Sunlight (1977) Holdings has performed in the past in other metrics, you can view this free graph of Sunlight (1977) Holdings' past earnings, revenue and cash flow.
So How Is Sunlight (1977) Holdings' ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.8%. The amount of capital employed has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sunlight (1977) Holdings has. Given the stock has declined 15% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Sunlight (1977) Holdings we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While Sunlight (1977) Holdings 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.
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