Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Sichuan Jiuyuan Yinhai Software.Co.Ltd (SZSE:002777), it didn't seem to tick all of these boxes.
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 Sichuan Jiuyuan Yinhai Software.Co.Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CN¥156m ÷ (CN¥2.6b - CN¥793m) (Based on the trailing twelve months to March 2024).
So, Sichuan Jiuyuan Yinhai Software.Co.Ltd has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.4%.
In the above chart we have measured Sichuan Jiuyuan Yinhai Software.Co.Ltd'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 Sichuan Jiuyuan Yinhai Software.Co.Ltd .
What Does the ROCE Trend For Sichuan Jiuyuan Yinhai Software.Co.Ltd Tell Us?
When we looked at the ROCE trend at Sichuan Jiuyuan Yinhai Software.Co.Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Sichuan Jiuyuan Yinhai Software.Co.Ltd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
While Sichuan Jiuyuan Yinhai Software.Co.Ltd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 002777 on our platform.
While Sichuan Jiuyuan Yinhai Software.Co.Ltd 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.