Under The Bonnet, Neway Valve (Suzhou)'s (SHSE:603699) Returns Look Impressive

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at the ROCE trend of Neway Valve (Suzhou) (SHSE:603699) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Neway Valve (Suzhou):

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

0.23 = CN¥862m ÷ (CN¥7.7b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

So, Neway Valve (Suzhou) has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

View our latest analysis for Neway Valve (Suzhou)

Above you can see how the current ROCE for Neway Valve (Suzhou) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Neway Valve (Suzhou) for free.

What Can We Tell From Neway Valve (Suzhou)'s ROCE Trend?

Investors would be pleased with what's happening at Neway Valve (Suzhou). The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. So we're very much inspired by what we're seeing at Neway Valve (Suzhou) thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Neway Valve (Suzhou) has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Neway Valve (Suzhou)'s ROCE

All in all, it's terrific to see that Neway Valve (Suzhou) is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 56% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Neway Valve (Suzhou) that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.