The Return Trends At Sichuan Jiuzhou Electronic (SZSE:000801) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Sichuan Jiuzhou Electronic's (SZSE:000801) returns on capital, so let's have a look.

What Is 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 Sichuan Jiuzhou Electronic:

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

0.041 = CN¥149m ÷ (CN¥6.7b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

So, Sichuan Jiuzhou Electronic has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.4%.

Check out our latest analysis for Sichuan Jiuzhou Electronic

Above you can see how the current ROCE for Sichuan Jiuzhou Electronic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sichuan Jiuzhou Electronic .

So How Is Sichuan Jiuzhou Electronic's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.1%. The amount of capital employed has increased too, by 38%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Sichuan Jiuzhou Electronic's current liabilities are still rather high at 46% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sichuan Jiuzhou Electronic's ROCE

To sum it up, Sichuan Jiuzhou Electronic has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 119% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

On a final note, we found 3 warning signs for Sichuan Jiuzhou Electronic (1 is significant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.