Here's What's Concerning About Wuxi Sunlit Science and Technology's (HKG:1289) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Wuxi Sunlit Science and Technology (HKG:1289), the trends above didn't look too great.

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. The formula for this calculation on Wuxi Sunlit Science and Technology is:

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

0.0019 = CN¥1.2m ÷ (CN¥768m - CN¥132m) (Based on the trailing twelve months to June 2022).

Thus, Wuxi Sunlit Science and Technology has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.9%.

See our latest analysis for Wuxi Sunlit Science and Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi Sunlit Science and Technology's ROCE against it's prior returns. If you'd like to look at how Wuxi Sunlit Science and Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Wuxi Sunlit Science and Technology. To be more specific, the ROCE was 3.1% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wuxi Sunlit Science and Technology becoming one if things continue as they have.

What We Can Learn From Wuxi Sunlit Science and Technology's ROCE

In summary, it's unfortunate that Wuxi Sunlit Science and Technology is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 76% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Wuxi Sunlit Science and Technology, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While Wuxi Sunlit Science and 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.