What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sunlour PigmentLtd (SZSE:301036) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 Sunlour PigmentLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CN¥116m ÷ (CN¥1.9b - CN¥200m) (Based on the trailing twelve months to June 2024).
So, Sunlour PigmentLtd has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunlour PigmentLtd's ROCE against it's prior returns. If you're interested in investigating Sunlour PigmentLtd's past further, check out this free graph covering Sunlour PigmentLtd's past earnings, revenue and cash flow.
So How Is Sunlour PigmentLtd's ROCE Trending?
In terms of Sunlour PigmentLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Sunlour PigmentLtd has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
While returns have fallen for Sunlour PigmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you'd like to know more about Sunlour PigmentLtd, we've spotted 3 warning signs, and 2 of them can't be ignored.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.