Returns On Capital Signal Tricky Times Ahead For Sunjuice Holdings (TWSE:1256)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Sunjuice Holdings (TWSE:1256) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Sunjuice Holdings, this is the formula:

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

0.12 = NT$556m ÷ (NT$4.9b - NT$429m) (Based on the trailing twelve months to March 2024).

Thus, Sunjuice Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Food industry.

View our latest analysis for Sunjuice Holdings

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

What Does the ROCE Trend For Sunjuice Holdings Tell Us?

On the surface, the trend of ROCE at Sunjuice Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 30% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Sunjuice Holdings has decreased its current liabilities to 8.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sunjuice Holdings. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with Sunjuice Holdings (at least 1 which is significant) , and understanding these would certainly be useful.

While Sunjuice Holdings 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. 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.