Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Sunfonda Group Holdings' (HKG:1771) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sunfonda Group Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥304m ÷ (CN¥5.0b - CN¥2.6b) (Based on the trailing twelve months to December 2020).
Thus, Sunfonda Group Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 10% it's much better.
View our latest analysis for Sunfonda Group Holdings
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're interested in investigating Sunfonda Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The trends we've noticed at Sunfonda Group Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. 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 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, Sunfonda Group Holdings' current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Sunfonda Group Holdings' ROCE
In summary, it's great to see that Sunfonda Group 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. Considering the stock has delivered 6.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
One more thing, we've spotted 2 warning signs facing Sunfonda Group Holdings that you might find interesting.
While Sunfonda Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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About SEHK:1771
Sunfonda Group Holdings
An investment holding company, engages in the sale and service of motor vehicles in Mainland China.
Slight with mediocre balance sheet.
