Returns Are Gaining Momentum At Wuxi Sunlit Science and Technology (HKG:1289)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Wuxi Sunlit Science and Technology's (HKG:1289) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.016 = CN¥10m ÷ (CN¥787m - CN¥157m) (Based on the trailing twelve months to June 2021).

So, Wuxi Sunlit Science and Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

View our latest analysis for Wuxi Sunlit Science and 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're interested in investigating Wuxi Sunlit Science and Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Wuxi Sunlit Science and Technology's ROCE Trend?

Wuxi Sunlit Science and Technology has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Key Takeaway

As discussed above, Wuxi Sunlit Science and Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 72% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we've found 3 warning signs for Wuxi Sunlit Science and Technology that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.