There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Tansun Technology (SZSE:300872) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Tansun Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0013 = CN¥4.4m ÷ (CN¥4.0b - CN¥597m) (Based on the trailing twelve months to September 2023).
So, Tansun Technology has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Software industry average of 2.7%.
In the above chart we have measured Tansun Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tansun Technology .
So How Is Tansun Technology's ROCE Trending?
When we looked at the ROCE trend at Tansun Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.1% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Tansun Technology's ROCE
In summary, Tansun Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Tansun Technology and understanding it should be part of your investment process.
While Tansun Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.