Returns On Capital At Rongcheer Industrial Technology (Suzhou) (SZSE:301360) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Rongcheer Industrial Technology (Suzhou) (SZSE:301360) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Rongcheer Industrial Technology (Suzhou) is:

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

0.022 = CN¥25m ÷ (CN¥1.3b - CN¥167m) (Based on the trailing twelve months to March 2024).

So, Rongcheer Industrial Technology (Suzhou) has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

See our latest analysis for Rongcheer Industrial Technology (Suzhou)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rongcheer Industrial Technology (Suzhou)'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 Rongcheer Industrial Technology (Suzhou).

How Are Returns Trending?

When we looked at the ROCE trend at Rongcheer Industrial Technology (Suzhou), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.2% from 43% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Rongcheer Industrial Technology (Suzhou) has decreased its current liabilities to 13% 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. 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 Key Takeaway

To conclude, we've found that Rongcheer Industrial Technology (Suzhou) is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 48% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Rongcheer Industrial Technology (Suzhou) has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Rongcheer Industrial Technology (Suzhou) (including 1 which shouldn't be ignored) .

While Rongcheer Industrial Technology (Suzhou) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com