What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shenzhen Sunway Communication (SZSE:300136) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Sunway Communication is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥556m ÷ (CN¥13b - CN¥3.5b) (Based on the trailing twelve months to September 2023).
Thus, Shenzhen Sunway Communication has an ROCE of 5.9%. On its own, that's a low figure but it's around the 5.2% average generated by the Communications industry.
Check out our latest analysis for Shenzhen Sunway Communication
Above you can see how the current ROCE for Shenzhen Sunway Communication compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Sunway Communication here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Shenzhen Sunway Communication doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 5.9%. However it looks like Shenzhen Sunway Communication might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Shenzhen Sunway Communication's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.1% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching Shenzhen Sunway Communication, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.