Investors Shouldn't Overlook Suzhou Secote Precision ElectronicLTD's (SHSE:603283) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Suzhou Secote Precision ElectronicLTD (SHSE:603283) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for Suzhou Secote Precision ElectronicLTD:

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

0.25 = CN¥531m ÷ (CN¥5.6b - CN¥3.5b) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Secote Precision ElectronicLTD has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Machinery industry average of 6.3%.

Check out our latest analysis for Suzhou Secote Precision ElectronicLTD

Above you can see how the current ROCE for Suzhou Secote Precision ElectronicLTD compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Secote Precision ElectronicLTD .

So How Is Suzhou Secote Precision ElectronicLTD's ROCE Trending?

Suzhou Secote Precision ElectronicLTD is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 183%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 62% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Suzhou Secote Precision ElectronicLTD's ROCE

All in all, it's terrific to see that Suzhou Secote Precision ElectronicLTD is reaping the rewards from prior investments and is growing its capital base. And a remarkable 302% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Suzhou Secote Precision ElectronicLTD that you might find interesting.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.