To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Sunny Loan TopLtd (SHSE:600830) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on Sunny Loan TopLtd is:

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

0.0075 = CN¥24m ÷ (CN¥3.6b - CN¥455m) (Based on the trailing twelve months to September 2023).

Thus, Sunny Loan TopLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 5.5%.

View our latest analysis for Sunny Loan TopLtd

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

What Does the ROCE Trend For Sunny Loan TopLtd Tell Us?

There is reason to be cautious about Sunny Loan TopLtd, given the returns are trending downwards. About five years ago, returns on capital were 7.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sunny Loan TopLtd becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Sunny Loan TopLtd is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 91% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Sunny Loan TopLtd, we've spotted 2 warning signs, and 1 of them is significant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.