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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sunlight (1977) Holdings (HKG:8451) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Sunlight (1977) Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = S$935k ÷ (S$22m - S$1.5m) (Based on the trailing twelve months to September 2024).
So, Sunlight (1977) Holdings has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 14%.
See 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. Over the last five years, returns on capital employed have risen substantially to 4.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 23% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Sunlight (1977) Holdings' ROCE
In summary, it's great to see that Sunlight (1977) Holdings 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 since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we found 2 warning signs for Sunlight (1977) Holdings (1 is concerning) you should be aware of.
While Sunlight (1977) Holdings 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.