Sungrow Power Supply (SZSE:300274) Is Investing Its Capital With Increasing Efficiency

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Sungrow Power Supply (SZSE:300274) we really liked what we saw.

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. The formula for this calculation on Sungrow Power Supply is:

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

0.30 = CN¥12b ÷ (CN¥85b - CN¥44b) (Based on the trailing twelve months to March 2024).

Therefore, Sungrow Power Supply has an ROCE of 30%. 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 Sungrow Power Supply

In the above chart we have measured Sungrow Power Supply's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sungrow Power Supply .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Sungrow Power Supply. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 331%. So we're very much inspired by what we're seeing at Sungrow Power Supply thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sungrow Power Supply has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To sum it up, Sungrow Power Supply has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 922% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Sungrow Power Supply (including 1 which is concerning) .

Sungrow Power Supply 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.