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Here’s What’s Concerning About Sunlight Technology Holdings’ (HKG:1950) Returns On Capital

If you’re unsure where to start when looking for the next multi-excavator, there are a few key trends to keep in mind. A common approach is to find a company returns on capital employed (ROCE), which increases in connection with growth quantity of the capital employed. Ultimately, this shows that it is a company that is reinvesting profits with increasing returns. However, after the investigation Sunlight Technology Holdings ((HKG: 1950), we don’t think current trends fit into the shape of a multi-excavator.

Understanding Return on Investment (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (rate of return) in relation to the capital employed in the company. To calculate this metric for Sunlight Technology Holdings, the formula is:

Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

CN = 0.024 ± 5.7 m (CN 264 m – CN 26 m) (Based on the last twelve months up to December 2020).

So, Sunlight Technology Holdings has a ROCE of 2.4%. In absolute terms, this is a low return and is also below the chemical industry average of 9.5%.

Check out our latest analysis for Sunlight Technology Holdings

year
SEHK: 1950 return on investment May 17, 2021

Historical performance is a good place to start when studying a stock, so above you can see the measure of Sunlight Technology Holdings’ ROCE based on previous returns. If you want to dig into the historical earnings, sales, and cash flow of Sunlight Technology Holdings, be sure to read this one free Graphics here.

What the ROCE trend can tell us

We weren’t keen on the trend as Sunlight Technology Holdings’ ROCE has declined 89% over the past four years while the company put in 113% more capital. Usually this isn’t ideal, but given that Sunlight Technology Holdings raised capital prior to their last earnings announcement, it likely would have contributed at least in part to the increase in capital employed. The funds ingested have probably not yet been used. It is therefore worthwhile to watch what happens to Sunlight Technology Holdings’ earnings in the future and whether they change due to the capital increase.

In this context, Sunlight Technology Holdings has reduced its current liabilities to 9.8% of total assets. So we could relate some of that to the decline in ROCE. In effect, this means that their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would argue that doing so reduces the company’s efficiency in generating ROCE as it is now funding more operations with its own money.

The ROCE of Sunlight Technology Holdings

In conclusion, we are somewhat concerned about Sunlight Technology Holdings’ falling returns as capital increases. This could explain why the stock is down 76% overall over the past year. Given the underlying trends that aren’t doing particularly well in these areas, we’d consider looking elsewhere.

One final note, you should learn about that 4 warning signs We spotted Sunlight Technology Holdings (including 1 which is a little awkward). .

If you’re looking to find solid, high-revenue companies, check this out free List of companies with good balance sheets and impressive returns on equity.

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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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