The Returns On Capital At SanluxLtd (SZSE:002224) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think SanluxLtd (SZSE:002224) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 SanluxLtd:

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

0.0053 = CN¥18m ÷ (CN¥3.8b - CN¥487m) (Based on the trailing twelve months to September 2024).

So, SanluxLtd has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for SanluxLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for SanluxLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of SanluxLtd.

What Can We Tell From SanluxLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 5.0% five years ago, while the business's capital employed increased by 31%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. SanluxLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From SanluxLtd's ROCE

In summary, SanluxLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. Therefore based on the analysis done in this article, we don't think SanluxLtd has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with SanluxLtd (including 1 which is concerning) .

While SanluxLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.