What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Sunpower Group (SGX:5GD) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sunpower Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CN¥398m ÷ (CN¥7.8b - CN¥2.2b) (Based on the trailing twelve months to June 2023).
So, Sunpower Group has an ROCE of 7.1%. On its own, that's a low figure but it's around the 6.1% average generated by the Machinery industry.
Check out our latest analysis for Sunpower Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunpower Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sunpower Group, check out these free graphs here.
What Can We Tell From Sunpower Group's ROCE Trend?
In terms of Sunpower Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.1% for the last five years, and the capital employed within the business has risen 85% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Sunpower Group has done well to reduce current liabilities to 28% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
Our Take On Sunpower Group's ROCE
As we've seen above, Sunpower Group's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 2.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.