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Be Wary Of Sunny Optical Technology (Group) (HKG:2382) And Its Returns On Capital

Simply Wall St ·  08/17 10:40

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Sunny Optical Technology (Group) (HKG:2382), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Sunny Optical Technology (Group):

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

0.15 = CN¥3.4b ÷ (CN¥38b - CN¥15b) (Based on the trailing twelve months to June 2022).

Thus, Sunny Optical Technology (Group) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Electronic industry.

Check out our latest analysis for Sunny Optical Technology (Group)

roceSEHK:2382 Return on Capital Employed August 17th 2022

In the above chart we have measured Sunny Optical Technology (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Sunny Optical Technology (Group)'s ROCE Trend?

In terms of Sunny Optical Technology (Group)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Sunny Optical Technology (Group)'s diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 16% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

While Sunny Optical Technology (Group) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Sunny Optical Technology (Group) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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