- Hong Kong
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? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Sunray Engineering Group (HKG:8616), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Sunray Engineering Group, this is the formula:
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).
Thus, Sunray Engineering Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.0%.
View 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 want to delve into the historical earnings, revenue and cash flow of Sunray Engineering Group, check out these free graphs here.
The Trend Of ROCE
On the surface, the trend of ROCE at Sunray Engineering Group doesn't inspire confidence. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In summary, Sunray Engineering Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 39% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know more about Sunray Engineering Group, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.
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.
Sunray Engineering Group
Sunray Engineering Group Limited, an investment holding company, provides building protection solutions in Hong Kong and Macau.
Excellent balance sheet with poor track record.