To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, C Sun Mfg (TPE:2467) looks quite promising in regards to its trends of return on capital.
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 C Sun Mfg is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = NT$530m ÷ (NT$6.8b - NT$3.3b) (Based on the trailing twelve months to December 2020).
So, C Sun Mfg has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Machinery industry.
Check out our latest analysis for C Sun Mfg
Historical performance is a great place to start when researching a stock so above you can see the gauge for C Sun Mfg's ROCE against it's prior returns. If you're interested in investigating C Sun Mfg's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From C Sun Mfg's ROCE Trend?
We're delighted to see that C Sun Mfg is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 15%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, C Sun Mfg's current liabilities are still rather high at 49% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From C Sun Mfg's ROCE
In summary, we're delighted to see that C Sun Mfg has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 250% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if C Sun Mfg can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing C Sun Mfg, we've discovered 3 warning signs that you should be aware of.
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. 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 TWSE:2467
Flawless balance sheet with solid track record.
