To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Sinostar Cable (SZSE:300933), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sinostar Cable, this is the formula:

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

0.088 = CN¥125m ÷ (CN¥2.9b - CN¥1.5b) (Based on the trailing twelve months to March 2022).

So, Sinostar Cable has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.4%.

See our latest analysis for Sinostar Cable

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

How Are Returns Trending?

The returns on capital haven't changed much for Sinostar Cable in recent years. Over the past five years, ROCE has remained relatively flat at around 8.8% and the business has deployed 94% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Sinostar Cable's current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Sinostar Cable's ROCE

In conclusion, Sinostar Cable has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 27% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Sinostar Cable has the makings of a multi-bagger.

While Sinostar Cable doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.