Returns On Capital At Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Suzhou Alton Electrical & Mechanical Industry's (SZSE:301187) trend of ROCE, we liked what we saw.

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. To calculate this metric for Suzhou Alton Electrical & Mechanical Industry, this is the formula:

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

0.16 = CN¥234m ÷ (CN¥2.6b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Therefore, Suzhou Alton Electrical & Mechanical Industry has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 9.1% it's much better.

View our latest analysis for Suzhou Alton Electrical & Mechanical Industry

Above you can see how the current ROCE for Suzhou Alton Electrical & Mechanical Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Alton Electrical & Mechanical Industry .

What Can We Tell From Suzhou Alton Electrical & Mechanical Industry's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 422% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Suzhou Alton Electrical & Mechanical Industry has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Suzhou Alton Electrical & Mechanical Industry's ROCE

To sum it up, Suzhou Alton Electrical & Mechanical Industry has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Suzhou Alton Electrical & Mechanical Industry (of which 2 make us uncomfortable!) that you should know about.

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.