Sichuan Jiuyuan Yinhai Software.Co.Ltd (SZSE:002777) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Sichuan Jiuyuan Yinhai Software.Co.Ltd (SZSE:002777) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. Analysts use this formula to calculate it for Sichuan Jiuyuan Yinhai Software.Co.Ltd:

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

0.083 = CN¥153m ÷ (CN¥2.6b - CN¥793m) (Based on the trailing twelve months to March 2024).

Therefore, Sichuan Jiuyuan Yinhai Software.Co.Ltd has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.0%.

View our latest analysis for Sichuan Jiuyuan Yinhai Software.Co.Ltd

Above you can see how the current ROCE for Sichuan Jiuyuan Yinhai Software.Co.Ltd 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 Sichuan Jiuyuan Yinhai Software.Co.Ltd .

How Are Returns Trending?

When we looked at the ROCE trend at Sichuan Jiuyuan Yinhai Software.Co.Ltd, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Sichuan Jiuyuan Yinhai Software.Co.Ltd's ROCE

To conclude, we've found that Sichuan Jiuyuan Yinhai Software.Co.Ltd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Sichuan Jiuyuan Yinhai Software.Co.Ltd that we think you should be aware of.

While Sichuan Jiuyuan Yinhai Software.Co.Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.