Investors Could Be Concerned With Sunway's (SHSE:603333) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Sunway (SHSE:603333), it didn't seem to tick all of these boxes.

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. To calculate this metric for Sunway, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0067 = CN¥15m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Sunway has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Sunway

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunway's ROCE against it's prior returns. If you're interested in investigating Sunway's past further, check out this free graph covering Sunway's past earnings, revenue and cash flow.

So How Is Sunway's ROCE Trending?

In terms of Sunway's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sunway. However, despite the promising trends, the stock has fallen 65% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with Sunway (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.