Returns Are Gaining Momentum At Shandong Sacred Sun Power SourcesLtd (SZSE:002580)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shandong Sacred Sun Power SourcesLtd's (SZSE:002580) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Shandong Sacred Sun Power SourcesLtd, this is the formula:

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

0.071 = CN¥177m ÷ (CN¥3.3b - CN¥768m) (Based on the trailing twelve months to September 2023).

Thus, Shandong Sacred Sun Power SourcesLtd has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Check out our latest analysis for Shandong Sacred Sun Power SourcesLtd

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're interested in investigating Shandong Sacred Sun Power SourcesLtd's past further, check out this free graph covering Shandong Sacred Sun Power SourcesLtd's past earnings, revenue and cash flow.

What Can We Tell From Shandong Sacred Sun Power SourcesLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.1%. The amount of capital employed has increased too, by 73%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Shandong Sacred Sun Power SourcesLtd's ROCE

In summary, it's great to see that Shandong Sacred Sun Power SourcesLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Shandong Sacred Sun Power SourcesLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shandong Sacred Sun Power SourcesLtd 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.