Shareholders Are Optimistic That Sichuan SwellfunLtd (SHSE:600779) Will Multiply In Value

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Sichuan SwellfunLtd's (SHSE:600779) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sichuan SwellfunLtd, this is the formula:

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

0.35 = CN¥1.4b ÷ (CN¥7.9b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

Thus, Sichuan SwellfunLtd has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Sichuan SwellfunLtd

In the above chart we have measured Sichuan SwellfunLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sichuan SwellfunLtd for free.

How Are Returns Trending?

Sichuan SwellfunLtd deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 35% and the business has deployed 136% more capital into its operations. Now considering ROCE is an attractive 35%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that Sichuan SwellfunLtd 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sichuan SwellfunLtd's ROCE

In short, we'd argue Sichuan SwellfunLtd has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 10.0% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Sichuan SwellfunLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.