Returns On Capital At Sunplus Technology (TWSE:2401) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sunplus Technology (TWSE:2401) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sunplus Technology:

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

0.0089 = NT$113m ÷ (NT$15b - NT$1.8b) (Based on the trailing twelve months to September 2024).

Therefore, Sunplus Technology has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.3%.

View our latest analysis for Sunplus Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunplus Technology's ROCE against it's prior returns. If you're interested in investigating Sunplus Technology's past further, check out this free graph covering Sunplus Technology's past earnings, revenue and cash flow.

What Can We Tell From Sunplus Technology's ROCE Trend?

There are better returns on capital out there than what we're seeing at Sunplus Technology. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 0.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Sunplus Technology's ROCE

In conclusion, Sunplus Technology has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 148% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Sunplus Technology that we think you should be aware of.

While Sunplus Technology 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.