Suzhou Dongshan Precision Manufacturing (SZSE:002384) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Suzhou Dongshan Precision Manufacturing (SZSE:002384) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.08 = CN¥2.2b ÷ (CN¥46b - CN¥18b) (Based on the trailing twelve months to March 2024).

So, Suzhou Dongshan Precision Manufacturing has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

Check out our latest analysis for Suzhou Dongshan Precision Manufacturing

In the above chart we have measured Suzhou Dongshan Precision Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Dongshan Precision Manufacturing .

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 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 side note, Suzhou Dongshan Precision Manufacturing has done well to pay down its current liabilities to 40% 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. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Suzhou Dongshan Precision Manufacturing is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 37% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Suzhou Dongshan Precision Manufacturing does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com