Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Suzhou Alton Electrical & Mechanical Industry:

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

0.075 = CN¥116m ÷ (CN¥2.2b - CN¥669m) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Alton Electrical & Mechanical Industry has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 8.2%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Alton Electrical & Mechanical Industry .

The Trend Of ROCE

When we looked at the ROCE trend at Suzhou Alton Electrical & Mechanical Industry, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Suzhou Alton Electrical & Mechanical Industry has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Suzhou Alton Electrical & Mechanical Industry have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last year, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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 1 is significant!) that you should know about.

While Suzhou Alton Electrical & Mechanical Industry 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.