Suzhou Secote Precision ElectronicLTD (SHSE:603283) Knows How To Allocate Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Suzhou Secote Precision ElectronicLTD (SHSE:603283) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Suzhou Secote Precision ElectronicLTD is:

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

0.34 = CN¥846m ÷ (CN¥5.3b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

Therefore, Suzhou Secote Precision ElectronicLTD has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Machinery industry average of 5.5%.

View our latest analysis for Suzhou Secote Precision ElectronicLTD

In the above chart we have measured Suzhou Secote Precision ElectronicLTD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Secote Precision ElectronicLTD .

What Does the ROCE Trend For Suzhou Secote Precision ElectronicLTD Tell Us?

The trends we've noticed at Suzhou Secote Precision ElectronicLTD are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 34%. The amount of capital employed has increased too, by 211%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Suzhou Secote Precision ElectronicLTD has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Suzhou Secote Precision ElectronicLTD's ROCE

To sum it up, Suzhou Secote Precision ElectronicLTD has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 132% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Suzhou Secote Precision ElectronicLTD you'll probably want to know about.

Suzhou Secote Precision ElectronicLTD is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.