Zhejiang Sunflower Great Health (SZSE:300111) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Zhejiang Sunflower Great Health (SZSE:300111) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Zhejiang Sunflower Great Health, this is the formula:

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

0.031 = CN¥26m ÷ (CN¥996m - CN¥147m) (Based on the trailing twelve months to March 2024).

So, Zhejiang Sunflower Great Health has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.2%.

Check out our latest analysis for Zhejiang Sunflower Great Health

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Sunflower Great Health's past further, check out this free graph covering Zhejiang Sunflower Great Health's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Sunflower Great Health's ROCE Trend?

Zhejiang Sunflower Great Health has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.1% which is a sight for sore eyes. In addition to that, Zhejiang Sunflower Great Health is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Zhejiang Sunflower Great Health's ROCE

Long story short, we're delighted to see that Zhejiang Sunflower Great Health's reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Zhejiang Sunflower Great Health does come with some risks, and we've found 1 warning sign 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com