Suzhou Maxwell Technologies (SZSE:300751) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Suzhou Maxwell Technologies (SZSE:300751) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Suzhou Maxwell Technologies, this is the formula:

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

0.099 = CN¥847m ÷ (CN¥24b - CN¥16b) (Based on the trailing twelve months to June 2024).

Thus, Suzhou Maxwell Technologies has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.3%.

View our latest analysis for Suzhou Maxwell Technologies

In the above chart we have measured Suzhou Maxwell Technologies' 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 Maxwell Technologies for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Suzhou Maxwell Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Suzhou Maxwell Technologies has a high ratio of current liabilities to total assets of 65%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Suzhou Maxwell Technologies is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 106% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Suzhou Maxwell Technologies we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.