There Are Reasons To Feel Uneasy About Sun Art Retail Group's (HKG:6808) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Sun Art Retail Group (HKG:6808) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sun Art Retail Group, this is the formula:

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

0.019 = CN¥603m ÷ (CN¥67b - CN¥36b) (Based on the trailing twelve months to September 2022).

Therefore, Sun Art Retail Group has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 10.0%.

View our latest analysis for Sun Art Retail Group

In the above chart we have measured Sun Art Retail Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sun Art Retail Group.

So How Is Sun Art Retail Group's ROCE Trending?

When we looked at the ROCE trend at Sun Art Retail Group, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 1.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Sun Art Retail Group has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Sun Art Retail Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sun Art Retail Group have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 67% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in Sun Art Retail Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Sun Art Retail Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.