If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Sanjiang Shopping ClubLtd (SHSE:601116) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sanjiang Shopping ClubLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = CN¥96m ÷ (CN¥4.9b - CN¥1.5b) (Based on the trailing twelve months to June 2023).
Therefore, Sanjiang Shopping ClubLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.2%.
See our latest analysis for Sanjiang Shopping ClubLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanjiang Shopping ClubLtd's ROCE against it's prior returns. If you'd like to look at how Sanjiang Shopping ClubLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Sanjiang Shopping ClubLtd's ROCE Trend?
In terms of Sanjiang Shopping ClubLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.2% over the last five years. However it looks like Sanjiang Shopping ClubLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Sanjiang Shopping ClubLtd has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Sanjiang Shopping ClubLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Sanjiang Shopping ClubLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Sanjiang Shopping ClubLtd does come with some risks, and we've found 2 warning signs that you should be aware of.
While Sanjiang Shopping ClubLtd 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. 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.