What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Suwen Electric Energy TechnologyLtd (SZSE:300982), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Suwen Electric Energy TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = CN¥264m ÷ (CN¥4.7b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
So, Suwen Electric Energy TechnologyLtd has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Construction industry average of 6.8%.
See our latest analysis for Suwen Electric Energy TechnologyLtd
Above you can see how the current ROCE for Suwen Electric Energy TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Suwen Electric Energy TechnologyLtd.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 22% five years ago, while capital employed has grown 871%. That being said, Suwen Electric Energy TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Suwen Electric Energy TechnologyLtd might not have received a full period of earnings contribution from it.
On a side note, Suwen Electric Energy TechnologyLtd has done well to pay down its current liabilities to 31% 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 Suwen Electric Energy TechnologyLtd's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Suwen Electric Energy TechnologyLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 13% 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.
On a final note, we found 4 warning signs for Suwen Electric Energy TechnologyLtd (1 is significant) you should be aware of.
While Suwen Electric Energy TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.