The Returns On Capital At Sunward Intelligent Equipment (SZSE:002097) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sunward Intelligent Equipment (SZSE:002097), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Sunward Intelligent Equipment is:

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

0.0063 = CN¥75m ÷ (CN¥21b - CN¥9.3b) (Based on the trailing twelve months to March 2024).

Thus, Sunward Intelligent Equipment has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

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're interested in investigating Sunward Intelligent Equipment's past further, check out this free graph covering Sunward Intelligent Equipment's past earnings, revenue and cash flow.

So How Is Sunward Intelligent Equipment's ROCE Trending?

When we looked at the ROCE trend at Sunward Intelligent Equipment, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% 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.

Another thing to note, Sunward Intelligent Equipment has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 4 warning signs with Sunward Intelligent Equipment (at least 3 which are concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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