Here's What To Make Of Suntar Environmental Technology's (SHSE:688101) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Suntar Environmental Technology (SHSE:688101), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Suntar Environmental Technology is:

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

0.07 = CN¥294m ÷ (CN¥5.4b - CN¥1.2b) (Based on the trailing twelve months to December 2023).

Thus, Suntar Environmental Technology has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.7%.

See our latest analysis for Suntar Environmental Technology

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

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Suntar Environmental Technology in recent years. The company has employed 144% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Suntar Environmental Technology's ROCE

In summary, Suntar Environmental Technology has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last three years. Therefore based on the analysis done in this article, we don't think Suntar Environmental Technology has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Suntar Environmental Technology and understanding it should be part of your investment process.

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.