Why The 22% Return On Capital At Sailun Group (SHSE:601058) Should Have Your Attention

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Sailun Group (SHSE:601058) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sailun Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = CN¥5.0b ÷ (CN¥37b - CN¥15b) (Based on the trailing twelve months to June 2024).

So, Sailun Group has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 7.3%.

View our latest analysis for Sailun Group

Above you can see how the current ROCE for Sailun Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sailun Group .

So How Is Sailun Group's ROCE Trending?

We like the trends that we're seeing from Sailun Group. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 178%. So we're very much inspired by what we're seeing at Sailun Group thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 39%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Sailun Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Sailun Group's ROCE

To sum it up, Sailun Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 254% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Sailun Group and understanding this should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.