Investors Met With Slowing Returns on Capital At Sunwave CommunicationsLtd (SZSE:002115)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Sunwave CommunicationsLtd (SZSE:002115) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Sunwave CommunicationsLtd:

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

0.045 = CN¥125m ÷ (CN¥4.7b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Sunwave CommunicationsLtd has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Media industry average of 4.8%.

View our latest analysis for Sunwave CommunicationsLtd

Above you can see how the current ROCE for Sunwave CommunicationsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sunwave CommunicationsLtd for free.

What Can We Tell From Sunwave CommunicationsLtd's ROCE Trend?

Things have been pretty stable at Sunwave CommunicationsLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Sunwave CommunicationsLtd doesn't end up being a multi-bagger in a few years time.

Another thing to note, Sunwave CommunicationsLtd has a high ratio of current liabilities to total assets of 41%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Sunwave CommunicationsLtd's ROCE

In summary, Sunwave CommunicationsLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sunwave CommunicationsLtd has the makings of a multi-bagger.

Sunwave CommunicationsLtd does have some risks though, and we've spotted 1 warning sign for Sunwave CommunicationsLtd that you might be interested in.

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.