Slowing Rates Of Return At Sichuan Guangan Aaa PublicLtd (SHSE:600979) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Sichuan Guangan Aaa PublicLtd (SHSE:600979), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Sichuan Guangan Aaa PublicLtd is:

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

0.053 = CN¥496m ÷ (CN¥11b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Sichuan Guangan Aaa PublicLtd has an ROCE of 5.3%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

Check out our latest analysis for Sichuan Guangan Aaa PublicLtd

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'd like to look at how Sichuan Guangan Aaa PublicLtd has performed in the past in other metrics, you can view this free graph of Sichuan Guangan Aaa PublicLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Sichuan Guangan Aaa PublicLtd in recent years. The company has consistently earned 5.3% for the last five years, and the capital employed within the business has risen 37% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, Sichuan Guangan Aaa PublicLtd has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 86% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Sichuan Guangan Aaa PublicLtd (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While Sichuan Guangan Aaa PublicLtd 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.