Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Cofco Sugar HoldingLTD (SHSE:600737) looks decent, right now, so lets see what the trend of returns can tell us.
What Is 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. The formula for this calculation on Cofco Sugar HoldingLTD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥1.6b ÷ (CN¥26b - CN¥14b) (Based on the trailing twelve months to September 2023).
Thus, Cofco Sugar HoldingLTD has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.6% it's much better.
In the above chart we have measured Cofco Sugar HoldingLTD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cofco Sugar HoldingLTD .
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 28% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 55% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 55% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.
The Bottom Line On Cofco Sugar HoldingLTD's ROCE
To sum it up, Cofco Sugar HoldingLTD has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 17% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Cofco Sugar HoldingLTD is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Cofco Sugar HoldingLTD does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.