Shenzhen Sunshine Laser & Electronics Technology (SZSE:300227) Will Want To Turn Around Its Return Trends

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Shenzhen Sunshine Laser & Electronics Technology (SZSE:300227) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Shenzhen Sunshine Laser & Electronics Technology, this is the formula:

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

0.042 = CN¥78m ÷ (CN¥2.6b - CN¥793m) (Based on the trailing twelve months to December 2023).

So, Shenzhen Sunshine Laser & Electronics Technology has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

View our latest analysis for Shenzhen Sunshine Laser & Electronics Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Sunshine Laser & Electronics Technology.

So How Is Shenzhen Sunshine Laser & Electronics Technology's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Sunshine Laser & Electronics Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.2% from 8.6% five years ago. 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.

The Bottom Line On Shenzhen Sunshine Laser & Electronics Technology's ROCE

To conclude, we've found that Shenzhen Sunshine Laser & Electronics Technology is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we've found 1 warning sign for Shenzhen Sunshine Laser & Electronics Technology that we think you should be aware of.

While Shenzhen Sunshine Laser & Electronics Technology 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.