Returns On Capital At Sun* (TSE:4053) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sun* (TSE:4053), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sun* is:

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

0.14 = JP¥1.5b ÷ (JP¥14b - JP¥2.9b) (Based on the trailing twelve months to September 2024).

Therefore, Sun* has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the IT industry.

See our latest analysis for Sun*

Above you can see how the current ROCE for Sun* compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sun* for free.

So How Is Sun*'s ROCE Trending?

On the surface, the trend of ROCE at Sun* doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Sun* is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last three years. Therefore based on the analysis done in this article, we don't think Sun* has the makings of a multi-bagger.

Like most companies, Sun* does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.