Returns On Capital Are Showing Encouraging Signs At Wuxi Sunlit Science and Technology (HKG:1289)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Wuxi Sunlit Science and Technology (HKG:1289) looks quite promising in regards to its trends of return on capital.

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)

0.0053 = CN¥3.3m ÷ (CN¥748m - CN¥114m) (Based on the trailing twelve months to December 2020).

Therefore, Wuxi Sunlit Science and Technology has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.

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

The Trend Of ROCE

We're delighted to see that Wuxi Sunlit Science and Technology is reaping rewards from its investments and has now broken into profitability. The company now earns 0.5% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Wuxi Sunlit Science and Technology has remained flat over the period. 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 Bottom Line

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. And since the stock has fallen 70% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Wuxi Sunlit Science and Technology, you might be interested to know about the 5 warning signs that our analysis has discovered.

While Wuxi Sunlit Science and Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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