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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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 Sunny Optical Technology (Group) is:

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

0.02 = CN¥577m ÷ (CN¥50b - CN¥21b) (Based on the trailing twelve months to December 2023).

So, Sunny Optical Technology (Group) has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.6%.

Check out our latest analysis for Sunny Optical Technology (Group)

In the above chart we have measured Sunny Optical Technology (Group)'s 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 analyst report for Sunny Optical Technology (Group) .

How Are Returns Trending?

We weren't thrilled with the trend because Sunny Optical Technology (Group)'s ROCE has reduced by 90% over the last five years, while the business employed 105% more capital. That being said, Sunny Optical Technology (Group) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Sunny Optical Technology (Group) might not have received a full period of earnings contribution from it.

On a separate but related note, it's important to know that Sunny Optical Technology (Group) has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Sunny Optical Technology (Group)'s reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Sunny Optical Technology (Group) does have some risks though, and we've spotted 1 warning sign for Sunny Optical Technology (Group) that you might be interested in.

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.