Investors Met With Slowing Returns on Capital At Neway CNC Equipment (Suzhou) (SHSE:688697)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Neway CNC Equipment (Suzhou)'s (SHSE:688697) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Neway CNC Equipment (Suzhou):

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

0.19 = CN¥310m ÷ (CN¥4.0b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

Therefore, Neway CNC Equipment (Suzhou) has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

See our latest analysis for Neway CNC Equipment (Suzhou)

Above you can see how the current ROCE for Neway CNC Equipment (Suzhou) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Neway CNC Equipment (Suzhou) .

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

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 341% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 58% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

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

The main thing to remember is that Neway CNC Equipment (Suzhou) has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 10% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing: We've identified 2 warning signs with Neway CNC Equipment (Suzhou) (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.