The Returns At Sunny Friend Environmental Technology (TPE:8341) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So, when we ran our eye over Sunny Friend Environmental Technology's (TPE:8341) trend of ROCE, we liked what we saw.

Understanding 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 Sunny Friend Environmental Technology is:

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

0.20 = NT$1.2b ÷ (NT$7.1b - NT$742m) (Based on the trailing twelve months to September 2020).

Therefore, Sunny Friend Environmental Technology has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 5.0% it's much better.

View our latest analysis for Sunny Friend Environmental Technology

Above you can see how the current ROCE for Sunny Friend Environmental Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sunny Friend Environmental Technology.

What Does the ROCE Trend For Sunny Friend Environmental Technology Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 163% more capital into its operations. 20% is a pretty standard return, and it provides some comfort knowing that Sunny Friend Environmental Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Sunny Friend Environmental Technology's ROCE

In the end, Sunny Friend Environmental Technology has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sunny Friend Environmental Technology (of which 1 can't be ignored!) that you should know about.

While Sunny Friend Environmental Technology 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. 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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