Sichuan Jiuzhou Electronic (SZSE:000801) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 on that note, Sichuan Jiuzhou Electronic (SZSE:000801) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Sichuan Jiuzhou Electronic is:

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

0.025 = CN¥91m ÷ (CN¥6.8b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Therefore, Sichuan Jiuzhou Electronic has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.6%.

See our latest analysis for Sichuan Jiuzhou Electronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Jiuzhou Electronic's ROCE against it's prior returns. If you're interested in investigating Sichuan Jiuzhou Electronic's past further, check out this free graph covering Sichuan Jiuzhou Electronic's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 39% more capital is being employed now too. So we're very much inspired by what we're seeing at Sichuan Jiuzhou Electronic thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sichuan Jiuzhou Electronic has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Sichuan Jiuzhou Electronic's ROCE

In summary, it's great to see that Sichuan Jiuzhou Electronic 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 stock has returned a staggering 209% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Sichuan Jiuzhou Electronic can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Sichuan Jiuzhou Electronic (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Sichuan Jiuzhou Electronic 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.