The Returns At Sunfonda Group Holdings (HKG:1771) Provide Us With Signs Of What's To Come

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after investigating Sunfonda Group Holdings (HKG:1771), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.093 = CN¥217m ÷ (CN¥5.4b - CN¥3.0b) (Based on the trailing twelve months to June 2020).

Thus, Sunfonda Group Holdings has an ROCE of 9.3%. On its own, that's a low figure but it's around the 11% average generated by the Specialty Retail industry.

See our latest analysis for Sunfonda Group Holdings

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 Sunfonda Group Holdings, check out these free graphs here.

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

On the surface, the trend of ROCE at Sunfonda Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Another thing to note, Sunfonda Group Holdings has a high ratio of current liabilities to total assets of 56%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Sunfonda Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Sunfonda Group Holdings has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Sunfonda Group Holdings (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Sunfonda Group Holdings 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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