Some Investors May Be Worried About SUNeVision Holdings' (HKG:1686) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating SUNeVision Holdings (HKG:1686), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for SUNeVision Holdings, this is the formula:

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

0.072 = HK$1.0b ÷ (HK$18b - HK$3.7b) (Based on the trailing twelve months to June 2022).

Thus, SUNeVision Holdings has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the IT industry average of 5.7%.

Check out the opportunities and risks within the HK IT industry.

In the above chart we have measured SUNeVision Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From SUNeVision Holdings' ROCE Trend?

On the surface, the trend of ROCE at SUNeVision Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On SUNeVision Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SUNeVision Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, SUNeVision Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While SUNeVision 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.