If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Sanchuan Wisdom Technology (SZSE:300066) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Sanchuan Wisdom Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = CN¥140m ÷ (CN¥3.2b - CN¥568m) (Based on the trailing twelve months to September 2023).
Therefore, Sanchuan Wisdom Technology has an ROCE of 5.3%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.
View our latest analysis for Sanchuan Wisdom Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanchuan Wisdom Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sanchuan Wisdom Technology, check out these free graphs here.
So How Is Sanchuan Wisdom Technology's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 5.3%. The amount of capital employed has increased too, by 56%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Sanchuan Wisdom Technology's ROCE
To sum it up, Sanchuan Wisdom Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know about the risks facing Sanchuan Wisdom Technology, we've discovered 2 warning signs that you should be aware of.
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.