Returns On Capital Are Showing Encouraging Signs At SZZT ElectronicsLTD (SZSE:002197)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SZZT ElectronicsLTD (SZSE:002197) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on SZZT ElectronicsLTD is:

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

0.018 = CN¥86m ÷ (CN¥6.9b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Thus, SZZT ElectronicsLTD has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

Check out our latest analysis for SZZT ElectronicsLTD

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 SZZT ElectronicsLTD has performed in the past in other metrics, you can view this free graph of SZZT ElectronicsLTD's past earnings, revenue and cash flow.

So How Is SZZT ElectronicsLTD's ROCE Trending?

The fact that SZZT ElectronicsLTD is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.8% on its capital. And unsurprisingly, like most companies trying to break into the black, SZZT ElectronicsLTD is utilizing 50% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On SZZT ElectronicsLTD's ROCE

In summary, it's great to see that SZZT ElectronicsLTD has managed to break into profitability and is continuing to reinvest in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with SZZT ElectronicsLTD and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.