Some Investors May Be Worried About Sunlight (1977) Holdings' (HKG:8451) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Sunlight (1977) Holdings (HKG:8451) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Sunlight (1977) Holdings is:

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

0.026 = S$472k ÷ (S$19m - S$1.2m) (Based on the trailing twelve months to June 2023).

Therefore, Sunlight (1977) Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 6.7%.

See our latest analysis for Sunlight (1977) Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunlight (1977) Holdings' ROCE against it's prior returns. If you're interested in investigating Sunlight (1977) Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sunlight (1977) Holdings Tell Us?

In terms of Sunlight (1977) Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 2.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sunlight (1977) Holdings has done well to pay down its current liabilities to 6.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sunlight (1977) Holdings. And the stock has followed suit returning a meaningful 81% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Sunlight (1977) Holdings (1 is potentially serious) you should be aware of.

While Sunlight (1977) Holdings 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.