What Can The Trends At Sunny Electronics (KRX:004770) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sunny Electronics (KRX:004770) so let's look a bit deeper.

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. To calculate this metric for Sunny Electronics, this is the formula:

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

0.05 = ₩3.2b ÷ (₩64b - ₩1.2b) (Based on the trailing twelve months to September 2020).

Thus, Sunny Electronics has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.6% average generated by the Electronic industry.

See our latest analysis for Sunny Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunny Electronics' ROCE against it's prior returns. If you'd like to look at how Sunny Electronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sunny Electronics Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 78%. So we're very much inspired by what we're seeing at Sunny Electronics thanks to its ability to profitably reinvest capital.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sunny Electronics has. Given the stock has declined 12% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

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

While Sunny Electronics 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. 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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