There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating Suzhou Hengmingda Electronic Technology (SZSE:002947), we don't think it's current trends fit the mold of a multi-bagger.
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 Hengmingda Electronic Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = CN¥192m ÷ (CN¥2.4b - CN¥383m) (Based on the trailing twelve months to June 2023).
So, Suzhou Hengmingda Electronic Technology has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.3%.
See our latest analysis for Suzhou Hengmingda Electronic Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou Hengmingda Electronic Technology's ROCE against it's prior returns. If you're interested in investigating Suzhou Hengmingda Electronic Technology's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We weren't thrilled with the trend because Suzhou Hengmingda Electronic Technology's ROCE has reduced by 66% over the last five years, while the business employed 320% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Suzhou Hengmingda Electronic Technology's earnings and if they change as a result from the capital raise.
In Conclusion...
While returns have fallen for Suzhou Hengmingda Electronic Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Like most companies, Suzhou Hengmingda Electronic Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.