What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, from a first glance at Sunshine Global CircuitsLtd (SZSE:300739) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Sunshine Global CircuitsLtd:

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

0.035 = CN¥100m ÷ (CN¥3.4b - CN¥594m) (Based on the trailing twelve months to September 2023).

So, Sunshine Global CircuitsLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

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

The Trend Of ROCE

When we looked at the ROCE trend at Sunshine Global CircuitsLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 3.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 Sunshine Global CircuitsLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Sunshine Global CircuitsLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Sunshine Global CircuitsLtd 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.