Returns On Capital At Sunward Intelligent Equipment (SZSE:002097) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Sunward Intelligent Equipment (SZSE:002097) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Sunward Intelligent Equipment:

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

0.013 = CN¥149m ÷ (CN¥21b - CN¥9.6b) (Based on the trailing twelve months to September 2024).

Thus, Sunward Intelligent Equipment has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for Sunward Intelligent Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunward Intelligent Equipment's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sunward Intelligent Equipment.

The Trend Of ROCE

On the surface, the trend of ROCE at Sunward Intelligent Equipment doesn't inspire confidence. To be more specific, ROCE has fallen from 7.7% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Sunward Intelligent Equipment's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Sunward Intelligent Equipment's ROCE

Bringing it all together, while we're somewhat encouraged by Sunward Intelligent Equipment's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 40% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Sunward Intelligent Equipment does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Sunward Intelligent Equipment 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.

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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.