There's Been No Shortage Of Growth Recently For Suzhou Delphi Laser's (SHSE:688170) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Suzhou Delphi Laser (SHSE:688170) looks quite promising in regards to its trends of return on capital.

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 Delphi Laser is:

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

0.024 = CN¥31m ÷ (CN¥1.7b - CN¥358m) (Based on the trailing twelve months to December 2023).

Therefore, Suzhou Delphi Laser has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.3%.

Check out our latest analysis for Suzhou Delphi Laser

In the above chart we have measured Suzhou Delphi Laser's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Suzhou Delphi Laser for free.

What The Trend Of ROCE Can Tell Us

The fact that Suzhou Delphi Laser is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Suzhou Delphi Laser is utilizing 431% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Suzhou Delphi Laser has decreased current liabilities to 22% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Suzhou Delphi Laser has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Suzhou Delphi Laser's ROCE

Overall, Suzhou Delphi Laser gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 38% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Suzhou Delphi Laser does have some risks though, and we've spotted 2 warning signs for Suzhou Delphi Laser that you might be interested in.

While Suzhou Delphi Laser isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.