Finding companies with the potential to grow big isn't easy, but it can be done by looking at a few key financial metrics. First, we look at a proven growing Return on Invested Capital (ROCE), and then the growth of invested capital. Ultimately, this indicates a company that is reinvesting profits at an increasing rate of return. With this in mind, we've noticed some promising trends at Sharetronic Data Technology (SZSE:300857), so let's take a closer look.
Understanding Return on Invested Capital (ROCE)
For those who haven't used ROCE before, it measures the “return on investment” (profit before tax) a company generates from the capital employed in its business. Analysts use the following formula to calculate Sharetronic Data Technology's ROCE:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = CNY458m ÷ (CNY5.5b – CNY2.8b) (Based on the trailing twelve months to March 2024).
That means Sharetronic Data Technology has an ROCE of 17% – a standard return in itself, but much better than the 5.4% generated by the technology industry.
Check out our latest analysis for Sharetronic Data Technology
SZSE:300857 Return on Invested Capital August 12, 2024
Above you can see how Sharetronic Data Technology's current ROCE compares to its prior returns on capital, but the history can only tell you so much, and if you want to see what analysts are predicting going forward you can take a look at this free analyst report on Sharetronic Data Technology.
ROCE Trends
We like what's happening with Sharetronic Data Technology. Our data shows that over the past five years, return on capital has increased substantially by 17%. It's also worth noting that the company has substantially increased earnings per dollar of capital employed, with the amount of capital also growing by 341%. Increased earnings with increased capital is common among multi-baggers, which is why we're impressed.
As an aside, the improvement in ROCE appears to be partly driven by an increase in current liabilities. In real terms, this means that suppliers or short-term creditors are now funding 51% of the business, which is more than five years ago. Given that this ratio is quite high, investors should bear in mind that current liabilities at that level may pose some risk to any given business.
What we can learn from Sharetronic Data Technology's ROCE
In summary, it's great to see Sharetronic Data Technology is able to compound its earnings by continually reinvesting capital and increasing its rate of return, as this is part of the key ingredients of a highly popular multi-bagger. Investors seem to be aware of these changes, as the stock has returned an astounding 101% to shareholders over the past three years. With that in mind, I think it's worth investigating this stock further, as if Sharetronic Data Technology can maintain these trends, it could have a bright future ahead.
One more thing: Sharetronic Data Technology has identified 2 warning signs (at least 1 which is potentially serious) and it would certainly be beneficial for you to understand these.
Sharetronic Data Technology may not be earning the highest profit margins currently, but we've compiled a list of companies currently earning ROE above 25%, and you can see this free list here.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
