Here's What's Concerning About Sanyou's (SZSE:300932) 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Sanyou (SZSE:300932), it didn't seem to tick all of these boxes.

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 Sanyou:

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

0.021 = CN¥42m ÷ (CN¥3.0b - CN¥946m) (Based on the trailing twelve months to March 2024).

So, Sanyou has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Sanyou

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

So How Is Sanyou's ROCE Trending?

In terms of Sanyou's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 15% five years ago. However it looks like Sanyou might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Sanyou's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Sanyou we've found 5 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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