Songcheng Performance DevelopmentLtd (SZSE:300144) Has Some Way To Go To Become A Multi-Bagger

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. 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. Having said that, from a first glance at Songcheng Performance DevelopmentLtd (SZSE:300144) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Songcheng Performance DevelopmentLtd is:

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

0.13 = CN¥1.2b ÷ (CN¥9.8b - CN¥701m) (Based on the trailing twelve months to September 2024).

Thus, Songcheng Performance DevelopmentLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Hospitality industry.

View our latest analysis for Songcheng Performance DevelopmentLtd

Above you can see how the current ROCE for Songcheng Performance DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Songcheng Performance DevelopmentLtd .

The Trend Of ROCE

Over the past five years, Songcheng Performance DevelopmentLtd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Songcheng Performance DevelopmentLtd doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Songcheng Performance DevelopmentLtd's ROCE

In summary, Songcheng Performance DevelopmentLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Songcheng Performance DevelopmentLtd, we've discovered 3 warning signs that 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.