Be Wary Of Suzhou Chunqiu Electronic Technology (SHSE:603890) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. 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 Chunqiu Electronic Technology (SHSE:603890) 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?

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 Chunqiu Electronic Technology, this is the formula:

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

0.027 = CN¥102m ÷ (CN¥5.9b - CN¥2.2b) (Based on the trailing twelve months to June 2024).

Therefore, Suzhou Chunqiu Electronic Technology has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

View our latest analysis for Suzhou Chunqiu 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 Chunqiu Electronic Technology has performed in the past in other metrics, you can view this free graph of Suzhou Chunqiu Electronic Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Suzhou Chunqiu Electronic Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.7% from 7.5% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Suzhou Chunqiu Electronic Technology is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 42% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Suzhou Chunqiu Electronic Technology does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Suzhou Chunqiu Electronic Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.