Stock Analysis

Does China Sunshine Paper Holdings (HKG:2002) Have The Makings Of A Multi-Bagger?

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in China Sunshine Paper Holdings' (HKG:2002) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for China Sunshine Paper Holdings:

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

0.19 = CN¥704m ÷ (CN¥10b - CN¥6.4b) (Based on the trailing twelve months to June 2020).

So, China Sunshine Paper Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Packaging industry.

View our latest analysis for China Sunshine Paper Holdings

SEHK:2002 Return on Capital Employed December 14th 2020

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 want to delve into the historical earnings, revenue and cash flow of China Sunshine Paper Holdings, check out these free graphs here.

What Can We Tell From China Sunshine Paper Holdings' ROCE Trend?

The trends we've noticed at China Sunshine Paper Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 68% more capital is being employed now too. So we're very much inspired by what we're seeing at China Sunshine Paper Holdings thanks to its ability to profitably reinvest capital.

Another thing to note, China Sunshine Paper Holdings has a high ratio of current liabilities to total assets of 63%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, it's great to see that China Sunshine Paper Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. In light of that, we think it's worth looking further into this stock because if China Sunshine Paper Holdings can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for China Sunshine Paper Holdings you'll probably want to know about.

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