Sunfonda Group Holdings (HKG:1771) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over Sunfonda Group Holdings' (HKG:1771) trend of ROCE, we liked what we saw.

What Is 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 Sunfonda Group Holdings:

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

0.12 = CN¥399m ÷ (CN¥5.9b - CN¥2.6b) (Based on the trailing twelve months to December 2021).

Therefore, Sunfonda Group Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 10% it's much better.

Check out our latest analysis for Sunfonda Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunfonda Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sunfonda Group Holdings, check out these free graphs here.

What Does the ROCE Trend For Sunfonda Group Holdings Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 90% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Sunfonda Group Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Sunfonda Group Holdings has a high ratio of current liabilities to total assets of 44%. 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 Sunfonda Group Holdings' ROCE

The main thing to remember is that Sunfonda Group Holdings has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 4.5% over the last five years for shareholders who have owned the stock in this period. So to determine if Sunfonda Group Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Sunfonda Group Holdings does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.