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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, Wuxi Sunlit Science and Technology (HKG:1289) looks quite promising in regards to its trends of return on capital.
What Is 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. To calculate this metric for Wuxi Sunlit Science and Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CN¥57m ÷ (CN¥1.2b - CN¥477m) (Based on the trailing twelve months to June 2024).
So, Wuxi Sunlit Science and Technology has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 8.8%.
See our latest analysis for Wuxi Sunlit Science and Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi Sunlit Science and Technology's ROCE against it's prior returns. If you'd like to look at how Wuxi Sunlit Science and Technology has performed in the past in other metrics, you can view this free graph of Wuxi Sunlit Science and Technology's past earnings, revenue and cash flow.
What Can We Tell From Wuxi Sunlit Science and Technology's ROCE Trend?
Wuxi Sunlit Science and Technology's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 5,380% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Wuxi Sunlit Science and Technology's ROCE
As discussed above, Wuxi Sunlit Science and Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing to note, we've identified 2 warning signs with Wuxi Sunlit Science and Technology and understanding them should be part of your investment process.
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.