There Are Reasons To Feel Uneasy About Suzhou Maxwell Technologies' (SZSE:300751) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. The formula for this calculation on Suzhou Maxwell Technologies is:

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

0.097 = CN¥756m ÷ (CN¥23b - CN¥15b) (Based on the trailing twelve months to September 2023).

So, Suzhou Maxwell Technologies has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.0% generated by the Semiconductor industry, it's much better.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Maxwell Technologies .

What Does the ROCE Trend For Suzhou Maxwell Technologies Tell Us?

On the surface, the trend of ROCE at Suzhou Maxwell Technologies doesn't inspire confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 9.7%. 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.

On a side note, Suzhou Maxwell Technologies has done well to pay down its current liabilities to 66% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Keep in mind 66% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Suzhou Maxwell Technologies' 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 Maxwell Technologies. And the stock has done incredibly well with a 191% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 3 warning signs for Suzhou Maxwell Technologies (1 shouldn't be ignored) you should be aware of.

While Suzhou Maxwell Technologies 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.