Suzhou Industrial Park Heshun Electric (SZSE:300141) Will Be Hoping To Turn Its Returns On Capital Around

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Suzhou Industrial Park Heshun Electric (SZSE:300141), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

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 Industrial Park Heshun Electric is:

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

0.0086 = CN¥5.9m ÷ (CN¥993m - CN¥303m) (Based on the trailing twelve months to September 2023).

So, Suzhou Industrial Park Heshun Electric has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.

View our latest analysis for Suzhou Industrial Park Heshun Electric

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Suzhou Industrial Park Heshun Electric has performed in the past in other metrics, you can view this free graph of Suzhou Industrial Park Heshun Electric's past earnings, revenue and cash flow.

What Can We Tell From Suzhou Industrial Park Heshun Electric's ROCE Trend?

In terms of Suzhou Industrial Park Heshun Electric's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 1.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Suzhou Industrial Park Heshun Electric becoming one if things continue as they have.

On a related note, Suzhou Industrial Park Heshun Electric has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Suzhou Industrial Park Heshun Electric does have some risks though, and we've spotted 1 warning sign for Suzhou Industrial Park Heshun Electric that you might be interested in.

While Suzhou Industrial Park Heshun Electric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.