Be Wary Of Suzhou YourBest New-type MaterialsLtd (SZSE:301266) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Suzhou YourBest New-type MaterialsLtd (SZSE:301266) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Suzhou YourBest New-type MaterialsLtd, this is the formula:

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

0.087 = CN¥178m ÷ (CN¥3.2b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou YourBest New-type MaterialsLtd has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

Check out our latest analysis for Suzhou YourBest New-type MaterialsLtd

Above you can see how the current ROCE for Suzhou YourBest New-type MaterialsLtd 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 YourBest New-type MaterialsLtd .

What Can We Tell From Suzhou YourBest New-type MaterialsLtd's ROCE Trend?

In terms of Suzhou YourBest New-type MaterialsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.7% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Suzhou YourBest New-type MaterialsLtd. However, despite the promising trends, the stock has fallen 37% 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.

If you'd like to know more about Suzhou YourBest New-type MaterialsLtd, we've spotted 2 warning signs, and 1 of them is significant.

While Suzhou YourBest New-type MaterialsLtd 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.