Suzhou Etron TechnologiesLtd (SHSE:603380) 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Suzhou Etron TechnologiesLtd (SHSE:603380) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Suzhou Etron TechnologiesLtd, this is the formula:

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

0.099 = CN¥144m ÷ (CN¥2.4b - CN¥960m) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Etron TechnologiesLtd has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Electronic industry, it's much better.

See our latest analysis for Suzhou Etron TechnologiesLtd

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

What Does the ROCE Trend For Suzhou Etron TechnologiesLtd Tell Us?

In terms of Suzhou Etron TechnologiesLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.9%. 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.

On a side note, Suzhou Etron TechnologiesLtd's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Suzhou Etron TechnologiesLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Suzhou Etron TechnologiesLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 23% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Suzhou Etron TechnologiesLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Suzhou Etron TechnologiesLtd 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.