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.

Sunpower Group does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.