Returns On Capital At Suzhou Recodeal Interconnect SystemLtd (SHSE:688800) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Suzhou Recodeal Interconnect SystemLtd (SHSE:688800) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Suzhou Recodeal Interconnect SystemLtd is:

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

0.052 = CN¥124m ÷ (CN¥3.7b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Thus, Suzhou Recodeal Interconnect SystemLtd has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.0%.

Check out our latest analysis for Suzhou Recodeal Interconnect SystemLtd

In the above chart we have measured Suzhou Recodeal Interconnect SystemLtd'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 Recodeal Interconnect SystemLtd .

What Can We Tell From Suzhou Recodeal Interconnect SystemLtd's ROCE Trend?

On the surface, the trend of ROCE at Suzhou Recodeal Interconnect SystemLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 8.3% over the last five years. However it looks like Suzhou Recodeal Interconnect SystemLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Suzhou Recodeal Interconnect SystemLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Suzhou Recodeal Interconnect SystemLtd (including 1 which makes us a bit uncomfortable) .

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.

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