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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Suzhou Hengmingda Electronic Technology (SZSE:002947), it didn't seem to tick all of these boxes.

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 Suzhou Hengmingda Electronic Technology:

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

0.11 = CN¥237m ÷ (CN¥2.8b - CN¥672m) (Based on the trailing twelve months to September 2023).

Thus, Suzhou Hengmingda Electronic Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.0% generated by the Electronic industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Suzhou Hengmingda Electronic Technology, check out these free graphs here.

What Can We Tell From Suzhou Hengmingda Electronic Technology's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 29% five years ago, while capital employed has grown 315%. That being said, Suzhou Hengmingda Electronic Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.

The Key Takeaway

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 Hengmingda Electronic Technology. And the stock has followed suit returning a meaningful 32% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 2 warning signs for Suzhou Hengmingda Electronic Technology you'll probably want to know about.

While Suzhou Hengmingda Electronic Technology 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.