Wuxi Sunlit Science and Technology (HKG:1289) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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. 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).

Thus, Wuxi Sunlit Science and Technology has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10.0%.

See 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.

The Trend Of ROCE

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. 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. Because in the end, a business can only get so efficient.

What We Can Learn From Wuxi Sunlit Science and Technology's ROCE

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. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Wuxi Sunlit Science and Technology does have some risks though, and we've spotted 3 warning signs for Wuxi Sunlit Science and Technology that you might be interested in.

While Wuxi Sunlit Science and Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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