Suzhou Mingzhi Technology (SHSE:688355) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Suzhou Mingzhi Technology (SHSE:688355), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Suzhou Mingzhi Technology, this is the formula:

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

0.0081 = CN¥8.7m ÷ (CN¥1.3b - CN¥273m) (Based on the trailing twelve months to June 2024).

Thus, Suzhou Mingzhi Technology has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.1%.

Check out our latest analysis for Suzhou Mingzhi Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Suzhou Mingzhi Technology has performed in the past in other metrics, you can view this free graph of Suzhou Mingzhi Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Suzhou Mingzhi Technology Tell Us?

On the surface, the trend of ROCE at Suzhou Mingzhi Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.8% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Suzhou Mingzhi Technology has decreased its current liabilities to 20% 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.

What We Can Learn From Suzhou Mingzhi Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Suzhou Mingzhi Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Suzhou Mingzhi Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.