Sunny Optical Technology (Group) (HKG:2382) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Sunny Optical Technology (Group) (HKG:2382) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sunny Optical Technology (Group):

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

0.15 = CN¥3.4b ÷ (CN¥38b - CN¥15b) (Based on the trailing twelve months to June 2022).

Thus, Sunny Optical Technology (Group) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Electronic industry.

View our latest analysis for Sunny Optical Technology (Group)

Above you can see how the current ROCE for Sunny Optical Technology (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Sunny Optical Technology (Group) Tell Us?

On the surface, the trend of ROCE at Sunny Optical Technology (Group) doesn't inspire confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 15%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

We're a bit apprehensive about Sunny Optical Technology (Group) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you're still interested in Sunny Optical Technology (Group) it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Sunny Optical Technology (Group) 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. 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.