What We Make Of Big Sun Shine's (TPE:1475) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Big Sun Shine (TPE:1475) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Big Sun Shine is:

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

0.047 = NT$16m ÷ (NT$435m - NT$82m) (Based on the trailing twelve months to December 2020).

Therefore, Big Sun Shine has an ROCE of 4.7%. On its own, that's a low figure but it's around the 4.0% average generated by the Luxury industry.

See our latest analysis for Big Sun Shine

Historical performance is a great place to start when researching a stock so above you can see the gauge for Big Sun Shine's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Big Sun Shine, check out these free graphs here.

What Does the ROCE Trend For Big Sun Shine Tell Us?

The fact that Big Sun Shine is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.7% on its capital. Not only that, but the company is utilizing 67% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

Long story short, we're delighted to see that Big Sun Shine's reinvestment activities have paid off and the company is now profitable. And with a respectable 40% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Big Sun Shine does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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