Returns on Capital Paint A Bright Future For SAN BIAN SCIENCE& TECHNOLOGY (SZSE:002112)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in SAN BIAN SCIENCE& TECHNOLOGY's (SZSE:002112) returns on capital, so let's have a look.

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 SAN BIAN SCIENCE& TECHNOLOGY:

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

0.20 = CN¥140m ÷ (CN¥2.0b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Thus, SAN BIAN SCIENCE& TECHNOLOGY has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Electrical industry average of 6.0%.

View our latest analysis for SAN BIAN SCIENCE& TECHNOLOGY

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how SAN BIAN SCIENCE& TECHNOLOGY has performed in the past in other metrics, you can view this free graph of SAN BIAN SCIENCE& TECHNOLOGY's past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that SAN BIAN SCIENCE& TECHNOLOGY is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 20% which is a sight for sore eyes. In addition to that, SAN BIAN SCIENCE& TECHNOLOGY is employing 60% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In summary, it's great to see that SAN BIAN SCIENCE& TECHNOLOGY has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing SAN BIAN SCIENCE& TECHNOLOGY that you might find interesting.

SAN BIAN SCIENCE& TECHNOLOGY is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.