Suzhou K-Hiragawa Electronic Technology (SHSE:603052) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 K-Hiragawa Electronic Technology (SHSE:603052) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Suzhou K-Hiragawa Electronic Technology, this is the formula:

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

0.064 = CN¥69m ÷ (CN¥1.5b - CN¥421m) (Based on the trailing twelve months to June 2024).

Therefore, Suzhou K-Hiragawa Electronic Technology has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.4%.

Check out our latest analysis for Suzhou K-Hiragawa Electronic Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou K-Hiragawa Electronic Technology's ROCE against it's prior returns. If you're interested in investigating Suzhou K-Hiragawa Electronic Technology's past further, check out this free graph covering Suzhou K-Hiragawa Electronic Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Suzhou K-Hiragawa Electronic Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Suzhou K-Hiragawa Electronic Technology is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 57% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for Suzhou K-Hiragawa Electronic Technology you'll probably want to know about.

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.