Returns On Capital Signal Tricky Times Ahead For Suzhou Future Electrical (SZSE:301386)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Suzhou Future Electrical (SZSE:301386), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Suzhou Future Electrical is:

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

0.058 = CN¥89m ÷ (CN¥1.7b - CN¥187m) (Based on the trailing twelve months to March 2024).

So, Suzhou Future Electrical has an ROCE of 5.8%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

Check out our latest analysis for Suzhou Future Electrical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou Future Electrical's ROCE against it's prior returns. If you're interested in investigating Suzhou Future Electrical's past further, check out this free graph covering Suzhou Future Electrical's past earnings, revenue and cash flow.

What Does the ROCE Trend For Suzhou Future Electrical Tell Us?

When we looked at the ROCE trend at Suzhou Future Electrical, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Suzhou Future Electrical has decreased its current liabilities to 11% 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. 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 Bottom Line On Suzhou Future Electrical's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Suzhou Future Electrical is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 11% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for Suzhou Future Electrical that we think you should be aware of.

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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