Be Wary Of Suzhou SLAC Precision EquipmentLtd (SZSE:300382) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Suzhou SLAC Precision EquipmentLtd (SZSE:300382) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Suzhou SLAC Precision EquipmentLtd, this is the formula:

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

0.033 = CN¥119m ÷ (CN¥4.5b - CN¥932m) (Based on the trailing twelve months to March 2024).

So, Suzhou SLAC Precision EquipmentLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.7%.

See our latest analysis for Suzhou SLAC Precision EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou SLAC Precision EquipmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Suzhou SLAC Precision EquipmentLtd.

What Does the ROCE Trend For Suzhou SLAC Precision EquipmentLtd Tell Us?

On the surface, the trend of ROCE at Suzhou SLAC Precision EquipmentLtd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 3.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Suzhou SLAC Precision EquipmentLtd has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Suzhou SLAC Precision EquipmentLtd's ROCE

In summary, Suzhou SLAC Precision EquipmentLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Suzhou SLAC Precision EquipmentLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

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.