Wuxi Sunlit Science and Technology (HKG:1289) Is Experiencing Growth In Returns On Capital

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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

So, Wuxi Sunlit Science and Technology has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.0%.

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.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Wuxi Sunlit Science and Technology has 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. 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.

In Conclusion...

In summary, we're delighted to see that Wuxi Sunlit Science and Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 68% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 5 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.

If you’re looking to trade Wuxi Sunlit Science and Technology, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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