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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sunright's (SGX:S71) returns on capital, so let's have a look.
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 Sunright:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = S$4.6m ÷ (S$172m - S$30m) (Based on the trailing twelve months to July 2024).
Therefore, Sunright has an ROCE of 3.2%. On its own, that's a low figure but it's around the 3.6% average generated by the Semiconductor industry.
View our latest analysis for Sunright
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 Sunright's past further, check out this free graph covering Sunright's past earnings, revenue and cash flow.
The Trend Of ROCE
Shareholders will be relieved that Sunright has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line On Sunright's ROCE
To sum it up, Sunright is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 53% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.