Investors Could Be Concerned With Suzhou SLAC Precision EquipmentLtd's (SZSE:300382) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Suzhou SLAC Precision EquipmentLtd (SZSE:300382) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Suzhou SLAC Precision EquipmentLtd is:

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

0.00091 = CN¥3.2m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, Suzhou SLAC Precision EquipmentLtd has an ROCE of 0.09%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View 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're interested in investigating Suzhou SLAC Precision EquipmentLtd's past further, check out this free graph covering Suzhou SLAC Precision EquipmentLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Suzhou SLAC Precision EquipmentLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.09% from 17% five years ago. However it looks like Suzhou SLAC Precision EquipmentLtd 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.

On a side note, Suzhou SLAC Precision EquipmentLtd has done well to pay down its current liabilities to 25% 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.

What We Can Learn From 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. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 158% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Suzhou SLAC Precision EquipmentLtd we've found 5 warning signs (3 make us uncomfortable!) that you should be aware of before investing here.

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.