Returns Are Gaining Momentum At Shenzhen Sunlord ElectronicsLtd (SZSE:002138)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Shenzhen Sunlord ElectronicsLtd's (SZSE:002138) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shenzhen Sunlord ElectronicsLtd, this is the formula:

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

0.12 = CN¥1.2b ÷ (CN¥13b - CN¥3.2b) (Based on the trailing twelve months to December 2024).

Therefore, Shenzhen Sunlord ElectronicsLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.6% it's much better.

Check out our latest analysis for Shenzhen Sunlord ElectronicsLtd

In the above chart we have measured Shenzhen Sunlord ElectronicsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Sunlord ElectronicsLtd .

How Are Returns Trending?

Shenzhen Sunlord ElectronicsLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. 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 97%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Shenzhen Sunlord ElectronicsLtd's ROCE

All in all, it's terrific to see that Shenzhen Sunlord ElectronicsLtd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Shenzhen Sunlord ElectronicsLtd and understanding them should be part of your investment process.

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.