Returns on Capital Paint A Bright Future For Suzhou TFC Optical Communication (SZSE:300394)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Suzhou TFC Optical Communication's (SZSE:300394) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Suzhou TFC Optical Communication:

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

0.26 = CN¥975m ÷ (CN¥4.2b - CN¥493m) (Based on the trailing twelve months to March 2024).

Therefore, Suzhou TFC Optical Communication has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 4.0% earned by companies in a similar industry.

See our latest analysis for Suzhou TFC Optical Communication

Above you can see how the current ROCE for Suzhou TFC Optical Communication 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 TFC Optical Communication .

What Does the ROCE Trend For Suzhou TFC Optical Communication Tell Us?

Investors would be pleased with what's happening at Suzhou TFC Optical Communication. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 227% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Suzhou TFC Optical Communication has. Since the stock has returned a staggering 582% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Suzhou TFC Optical Communication (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

Suzhou TFC Optical Communication is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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