We Like These Underlying Return On Capital Trends At Zhejiang Sunoren Solar TechnologyLtd (SHSE:603105)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Zhejiang Sunoren Solar TechnologyLtd (SHSE:603105) so let's look a bit deeper.

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. To calculate this metric for Zhejiang Sunoren Solar TechnologyLtd, this is the formula:

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

0.084 = CN¥316m ÷ (CN¥4.3b - CN¥558m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Sunoren Solar TechnologyLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.1%.

View our latest analysis for Zhejiang Sunoren Solar TechnologyLtd

In the above chart we have measured Zhejiang Sunoren Solar TechnologyLtd'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 Zhejiang Sunoren Solar TechnologyLtd for free.

What Does the ROCE Trend For Zhejiang Sunoren Solar TechnologyLtd Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.4%. 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 107%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 13%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Zhejiang Sunoren Solar TechnologyLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

In summary, it's great to see that Zhejiang Sunoren Solar TechnologyLtd 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. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Zhejiang Sunoren Solar TechnologyLtd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Zhejiang Sunoren Solar TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.