Investors Could Be Concerned With Suzhou Longway Eletronic Machinery's (SZSE:301202) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Suzhou Longway Eletronic Machinery (SZSE:301202), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Suzhou Longway Eletronic Machinery:

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

0.058 = CN¥71m ÷ (CN¥1.5b - CN¥321m) (Based on the trailing twelve months to March 2024).

Therefore, Suzhou Longway Eletronic Machinery has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Tech industry average of 5.3%.

Check out our latest analysis for Suzhou Longway Eletronic Machinery

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're interested in investigating Suzhou Longway Eletronic Machinery's past further, check out this free graph covering Suzhou Longway Eletronic Machinery's past earnings, revenue and cash flow.

So How Is Suzhou Longway Eletronic Machinery's ROCE Trending?

When we looked at the ROCE trend at Suzhou Longway Eletronic Machinery, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 5.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Suzhou Longway Eletronic Machinery has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Suzhou Longway Eletronic Machinery's ROCE

While returns have fallen for Suzhou Longway Eletronic Machinery in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 19% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with Suzhou Longway Eletronic Machinery (including 1 which is concerning) .

While Suzhou Longway Eletronic Machinery 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.

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