Returns On Capital Signal Tricky Times Ahead For Sunray Engineering Group (HKG:8616)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Sunray Engineering Group (HKG:8616) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Sunray Engineering Group is:

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

0.10 = HK$18m ÷ (HK$245m - HK$64m) (Based on the trailing twelve months to December 2021).

Thus, Sunray Engineering Group has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.5% generated by the Construction industry.

See our latest analysis for Sunray Engineering Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunray Engineering Group's ROCE against it's prior returns. If you're interested in investigating Sunray Engineering Group's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sunray Engineering Group's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 10% from 32% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Sunray Engineering Group's ROCE

While returns have fallen for Sunray Engineering Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations.

Sunray Engineering Group does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think 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.