Returns On Capital Signal Difficult Times Ahead For Wuxi Sunlit Science and Technology (HKG:1289)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Wuxi Sunlit Science and Technology (HKG:1289), we weren't too upbeat about how things were going.

What Is 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. To calculate this metric for Wuxi Sunlit Science and Technology, this is the formula:

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).

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

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'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.

So How Is Wuxi Sunlit Science and Technology's ROCE Trending?

In terms of Wuxi Sunlit Science and Technology's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Wuxi Sunlit Science and Technology to turn into a multi-bagger.

The Bottom Line On Wuxi Sunlit Science and Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Wuxi Sunlit Science and Technology, we've spotted 4 warning signs, and 1 of them is potentially serious.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.