There Are Reasons To Feel Uneasy About Suzhou K-Hiragawa Electronic Technology's (SHSE:603052) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Suzhou K-Hiragawa Electronic Technology (SHSE:603052), 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 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)

0.084 = CN¥95m ÷ (CN¥1.5b - CN¥410m) (Based on the trailing twelve months to September 2023).

So, Suzhou K-Hiragawa Electronic Technology has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.3%.

See 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'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.

How Are Returns Trending?

When we looked at the ROCE trend at Suzhou K-Hiragawa Electronic Technology, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 8.4%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Suzhou K-Hiragawa Electronic Technology have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 5.0% return to shareholders who held over the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

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

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.