Sunray Engineering Group (HKG:8616) Will Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sunray Engineering Group (HKG:8616) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.12 = HK$20m ÷ (HK$209m - HK$44m) (Based on the trailing twelve months to December 2020).

Therefore, Sunray Engineering Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Construction industry.

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.

What Can We Tell From Sunray Engineering Group's ROCE Trend?

When we looked at the ROCE trend at Sunray Engineering Group, we didn't gain much confidence. Around two years ago the returns on capital were 32%, but since then they've fallen to 12%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line On Sunray Engineering Group's ROCE

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. Moreover, since the stock has crumbled 85% over the last year, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Sunray Engineering Group does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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. 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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