What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Suzhou UIGreen Micro&Nano TechnologiesLtd (SHSE:688661) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 UIGreen Micro&Nano TechnologiesLtd is:

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

0.13 = CN¥85m ÷ (CN¥697m - CN¥70m) (Based on the trailing twelve months to March 2022).

So, Suzhou UIGreen Micro&Nano TechnologiesLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Electronic industry.

View our latest analysis for Suzhou UIGreen Micro&Nano TechnologiesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou UIGreen Micro&Nano TechnologiesLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Suzhou UIGreen Micro&Nano TechnologiesLtd, check out these free graphs here.

So How Is Suzhou UIGreen Micro&Nano TechnologiesLtd's ROCE Trending?

When we looked at the ROCE trend at Suzhou UIGreen Micro&Nano TechnologiesLtd, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 13% from 50% four years ago. 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 related note, Suzhou UIGreen Micro&Nano TechnologiesLtd has decreased its current liabilities to 10% 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.

In Conclusion...

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 UIGreen Micro&Nano TechnologiesLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Suzhou UIGreen Micro&Nano TechnologiesLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Suzhou UIGreen Micro&Nano TechnologiesLtd 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.