There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at Sansure Biotech (SHSE:688289) and its trend of ROCE, we really liked what we saw.
Understanding 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 Sansure Biotech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥447m ÷ (CN¥8.3b - CN¥772m) (Based on the trailing twelve months to December 2023).
Therefore, Sansure Biotech has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.
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 Sansure Biotech's past further, check out this free graph covering Sansure Biotech's past earnings, revenue and cash flow.
So How Is Sansure Biotech's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.9%. The amount of capital employed has increased too, by 1,710%. So we're very much inspired by what we're seeing at Sansure Biotech thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 9.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Sansure Biotech has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Sansure Biotech's ROCE
In summary, it's great to see that Sansure Biotech 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. Given the stock has declined 67% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Sansure Biotech does have some risks though, and we've spotted 1 warning sign for Sansure Biotech that you might be interested in.
While Sansure Biotech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.