Suzhou Good-Ark Electronics' (SZSE:002079) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after investigating Suzhou Good-Ark Electronics (SZSE:002079), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Suzhou Good-Ark Electronics:

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

0.051 = CN¥164m ÷ (CN¥4.4b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, Suzhou Good-Ark Electronics has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

View our latest analysis for Suzhou Good-Ark Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou Good-Ark Electronics' ROCE against it's prior returns. If you'd like to look at how Suzhou Good-Ark Electronics has performed in the past in other metrics, you can view this free graph of Suzhou Good-Ark Electronics' past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Suzhou Good-Ark Electronics' ROCE has reduced by 43% over the last five years, while the business employed 72% more capital. Usually this isn't ideal, but given Suzhou Good-Ark Electronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Suzhou Good-Ark Electronics' earnings and if they change as a result from the capital raise.

On a side note, Suzhou Good-Ark Electronics' current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Suzhou Good-Ark Electronics' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Suzhou Good-Ark Electronics. However, despite the promising trends, the stock has fallen 28% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 2 warning signs for Suzhou Good-Ark Electronics you'll probably want to know about.

While Suzhou Good-Ark Electronics 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.