Is SUNeVision Holdings (HKG:1686) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think SUNeVision Holdings (HKG:1686) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 SUNeVision Holdings:

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

0.062 = HK$856m ÷ (HK$15b - HK$1.5b) (Based on the trailing twelve months to June 2020).

Thus, SUNeVision Holdings has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the IT industry average of 8.6%.

View our latest analysis for SUNeVision Holdings

In the above chart we have measured SUNeVision Holdings' 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 SUNeVision Holdings.

What Does the ROCE Trend For SUNeVision Holdings Tell Us?

When we looked at the ROCE trend at SUNeVision Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.2%. However it looks like SUNeVision Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

What We Can Learn From SUNeVision Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by SUNeVision Holdings' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 263% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with SUNeVision Holdings (at least 1 which is significant) , and understanding these would certainly be useful.

While SUNeVision 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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