Investors Shouldn't Overlook Sungrow Power Supply's (SZSE:300274) Impressive Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Sungrow Power Supply's (SZSE:300274) look very promising so lets take a 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. To calculate this metric for Sungrow Power Supply, this is the formula:

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

0.28 = CN¥12b ÷ (CN¥94b - CN¥50b) (Based on the trailing twelve months to June 2024).

Therefore, Sungrow Power Supply has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

See our latest analysis for Sungrow Power Supply

Above you can see how the current ROCE for Sungrow Power Supply compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sungrow Power Supply .

The Trend Of ROCE

The trends we've noticed at Sungrow Power Supply are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 363%. So we're very much inspired by what we're seeing at Sungrow Power Supply thanks to its ability to profitably reinvest capital.

On a side note, Sungrow Power Supply's current liabilities are still rather high at 52% of total assets. 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 Sungrow Power Supply's ROCE

All in all, it's terrific to see that Sungrow Power Supply is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Sungrow Power Supply can keep these trends up, it could have a bright future ahead.

Sungrow Power Supply does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Sungrow Power Supply is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.