Be Wary Of Sangfor Technologies (SZSE:300454) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Sangfor Technologies (SZSE:300454) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sangfor Technologies is:

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

0.0046 = CN¥44m ÷ (CN¥14b - CN¥4.4b) (Based on the trailing twelve months to September 2023).

So, Sangfor Technologies has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.7%.

See our latest analysis for Sangfor Technologies

In the above chart we have measured Sangfor Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sangfor Technologies .

What Does the ROCE Trend For Sangfor Technologies Tell Us?

When we looked at the ROCE trend at Sangfor Technologies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.5% from 16% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Sangfor Technologies' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last five years. Therefore based on the analysis done in this article, we don't think Sangfor Technologies has the makings of a multi-bagger.

If you want to continue researching Sangfor Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.