Returns On Capital At Sunray Engineering Group (HKG:8616) Paint A Concerning Picture

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sunray Engineering Group (HKG:8616), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Sunray Engineering Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = HK$6.8m ÷ (HK$267m - HK$79m) (Based on the trailing twelve months to December 2022).

Therefore, Sunray Engineering Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

Check out our latest analysis for Sunray Engineering Group

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 Sunray Engineering Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Sunray Engineering Group's ROCE Trending?

In terms of Sunray Engineering Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 32% over the last four years. However it looks like Sunray Engineering Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Sunray Engineering Group's ROCE

Bringing it all together, while we're somewhat encouraged by Sunray Engineering Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 89% over the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Sunray Engineering Group (of which 2 are concerning!) that you should know about.

While Sunray Engineering Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.