Suzhou K-Hiragawa Electronic Technology (SHSE:603052) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Suzhou K-Hiragawa Electronic Technology (SHSE:603052) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Suzhou K-Hiragawa Electronic Technology is:

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

0.058 = CN¥64m ÷ (CN¥1.6b - CN¥453m) (Based on the trailing twelve months to September 2024).

Therefore, Suzhou K-Hiragawa Electronic Technology has an ROCE of 5.8%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Suzhou K-Hiragawa Electronic Technology has performed in the past in other metrics, you can view this free graph of Suzhou K-Hiragawa Electronic Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Suzhou K-Hiragawa Electronic Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.8% from 27% five years ago. However it looks like Suzhou K-Hiragawa Electronic Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Suzhou K-Hiragawa Electronic Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Suzhou K-Hiragawa Electronic Technology's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 113% gain to shareholders who have held over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Suzhou K-Hiragawa Electronic Technology (including 1 which is potentially serious) .

While Suzhou K-Hiragawa Electronic Technology 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.