There Are Reasons To Feel Uneasy About Shenzhen Sunshine Laser & Electronics Technology's (SZSE:300227) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Shenzhen Sunshine Laser & Electronics Technology (SZSE:300227), it didn't seem to tick all of these boxes.

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 Sunshine Laser & Electronics Technology:

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

0.016 = CN¥31m ÷ (CN¥2.8b - CN¥932m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Sunshine Laser & Electronics Technology has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Shenzhen Sunshine Laser & Electronics Technology

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

What The Trend Of ROCE Can Tell Us

In terms of Shenzhen Sunshine Laser & Electronics Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.6% from 5.9% five years ago. However it looks like Shenzhen Sunshine Laser & Electronics Technology 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'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.

On a side note, Shenzhen Sunshine Laser & Electronics Technology's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, Shenzhen Sunshine Laser & Electronics Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Shenzhen Sunshine Laser & Electronics Technology (2 can't be ignored) 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.