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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sichuan Chengfei Integration TechnologyLtd (SZSE:002190) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sichuan Chengfei Integration TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = CN¥95m ÷ (CN¥5.5b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Therefore, Sichuan Chengfei Integration TechnologyLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Chengfei Integration TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Sichuan Chengfei Integration TechnologyLtd's past further, check out this free graph covering Sichuan Chengfei Integration TechnologyLtd's past earnings, revenue and cash flow.
What Does the ROCE Trend For Sichuan Chengfei Integration TechnologyLtd Tell Us?
We're delighted to see that Sichuan Chengfei Integration TechnologyLtd is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 2.2% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 39% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
In Conclusion...
In the end, Sichuan Chengfei Integration TechnologyLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 26% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Sichuan Chengfei Integration TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.