To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Sinomach Auto mobileLtd (SHSE:600335) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Sinomach Auto mobileLtd:

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

0.058 = CN¥719m ÷ (CN¥35b - CN¥23b) (Based on the trailing twelve months to September 2023).

Therefore, Sinomach Auto mobileLtd has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 5.5%.

See our latest analysis for Sinomach Auto mobileLtd

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

What Does the ROCE Trend For Sinomach Auto mobileLtd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 21%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Sinomach Auto mobileLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Sinomach Auto mobileLtd has a high ratio of current liabilities to total assets of 65%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sinomach Auto mobileLtd's ROCE

While returns have fallen for Sinomach Auto mobileLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 5 warning signs we've spotted with Sinomach Auto mobileLtd (including 1 which is significant) .

While Sinomach Auto mobileLtd 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.