If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we’ve noticed some promising trends at Sun.King Technology Group (HKG:580) so let’s look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Sun.King Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = CN¥211m ÷ (CN¥2.5b – CN¥806m) (Based on the trailing twelve months to June 2020).
So, Sun.King Technology Group has an ROCE of 12%. In absolute terms, that’s a satisfactory return, but compared to the Electrical industry average of 8.7% it’s much better.
Check out our latest analysis for Sun.King Technology Group
In the above chart we have measured Sun.King Technology Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Sun.King Technology Group.
How Are Returns Trending?
Sun.King Technology Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 94%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Bottom Line On Sun.King Technology Group’s ROCE
In summary, it’s great to see that Sun.King Technology Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 222% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Sun.King Technology Group can keep these trends up, it could have a bright future ahead.
Sun.King Technology Group does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Sun.King 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.
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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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