Slowing Rates Of Return At Shenzhen Sunlord ElectronicsLtd (SZSE:002138) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Shenzhen Sunlord ElectronicsLtd's (SZSE:002138) trend of ROCE, we liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Sunlord ElectronicsLtd:

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

0.11 = CN¥1.0b ÷ (CN¥13b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

So, Shenzhen Sunlord ElectronicsLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.2% it's much better.

See our latest analysis for Shenzhen Sunlord ElectronicsLtd

Above you can see how the current ROCE for Shenzhen Sunlord ElectronicsLtd 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 Shenzhen Sunlord ElectronicsLtd for free.

What Does the ROCE Trend For Shenzhen Sunlord ElectronicsLtd Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 118% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

The main thing to remember is that Shenzhen Sunlord ElectronicsLtd has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 8.3% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Like most companies, Shenzhen Sunlord ElectronicsLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shenzhen Sunlord ElectronicsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.