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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think China Sunsine Chemical Holdings (SGX:QES) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on China Sunsine Chemical Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥400m ÷ (CN¥4.4b - CN¥416m) (Based on the trailing twelve months to June 2024).
Therefore, China Sunsine Chemical Holdings has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 1.2% generated by the Chemicals industry.
Check out our latest analysis for China Sunsine Chemical Holdings
In the above chart we have measured China Sunsine Chemical Holdings' 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 China Sunsine Chemical Holdings .
What Can We Tell From China Sunsine Chemical Holdings' ROCE Trend?
On the surface, the trend of ROCE at China Sunsine Chemical Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by China Sunsine Chemical Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.