Some Investors May Be Worried About Suzhou Dongshan Precision Manufacturing's (SZSE:002384) Returns On 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Suzhou Dongshan Precision Manufacturing (SZSE:002384) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Suzhou Dongshan Precision Manufacturing is:

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

0.082 = CN¥2.1b ÷ (CN¥46b - CN¥20b) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Dongshan Precision Manufacturing has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

See our latest analysis for Suzhou Dongshan Precision Manufacturing

Above you can see how the current ROCE for Suzhou Dongshan Precision Manufacturing compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Dongshan Precision Manufacturing .

What Can We Tell From Suzhou Dongshan Precision Manufacturing's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 110%. Usually this isn't ideal, but given Suzhou Dongshan Precision Manufacturing conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Suzhou Dongshan Precision Manufacturing might not have received a full period of earnings contribution from it.

On a related note, Suzhou Dongshan Precision Manufacturing has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Suzhou Dongshan Precision Manufacturing's ROCE

In summary, Suzhou Dongshan Precision Manufacturing is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Suzhou Dongshan Precision Manufacturing has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Suzhou Dongshan Precision Manufacturing and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.