What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Sunny Optical Technology (Group) (HKG:2382) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sunny Optical Technology (Group), this is the formula:

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

0.045 = CN¥1.3b ÷ (CN¥49b - CN¥19b) (Based on the trailing twelve months to June 2024).

Therefore, Sunny Optical Technology (Group) has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.2%.

View our latest analysis for Sunny Optical Technology (Group)

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 analyst report for Sunny Optical Technology (Group) .

What Does the ROCE Trend For Sunny Optical Technology (Group) Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 93%. That being said, Sunny Optical Technology (Group) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sunny Optical Technology (Group) probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Sunny Optical Technology (Group) is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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 for 2382 on our platform.

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.

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.