Today we’ll evaluate Sunrex Technology Corporation (TPE:2387) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Sunrex Technology:

0.035 = NT$265m ÷ (NT$14b – NT$6.6b) (Based on the trailing twelve months to September 2019.)

Therefore, Sunrex Technology has an ROCE of 3.5%.

Check out our latest analysis for Sunrex Technology

Is Sunrex Technology’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Sunrex Technology’s ROCE appears meaningfully below the 8.1% average reported by the Tech industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Sunrex Technology compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.7% available in government bonds. Readers may wish to look for more rewarding investments.

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We can see that, Sunrex Technology currently has an ROCE of 3.5%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Sunrex Technology’s past growth compares to other companies.

TSEC:2387 Past Revenue and Net Income, January 19th 2020
TSEC:2387 Past Revenue and Net Income, January 19th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Sunrex Technology is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Sunrex Technology’s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Sunrex Technology has total assets of NT$14b and current liabilities of NT$6.6b. Therefore its current liabilities are equivalent to approximately 47% of its total assets. Sunrex Technology has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

What We Can Learn From Sunrex Technology’s ROCE

This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Sunrex Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.

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If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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