We Like These Underlying Return On Capital Trends At Wuxi Sunlit Science and Technology (HKG:1289)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Wuxi Sunlit Science and Technology (HKG:1289) looks quite promising in regards to its trends of return on capital.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.078 = CN¥55m ÷ (CN¥1.1b - CN¥351m) (Based on the trailing twelve months to December 2024).

Therefore, Wuxi Sunlit Science and Technology has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Wuxi Sunlit Science and Technology.

What The Trend Of ROCE Can Tell Us

Wuxi Sunlit Science and Technology has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.8%, which is always encouraging. While returns have increased, the amount of capital employed by Wuxi Sunlit Science and Technology has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

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

To bring it all together, Wuxi Sunlit Science and Technology has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Wuxi Sunlit Science and Technology, you might be interested to know about the 3 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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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.