If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Suzhou Dongshan Precision Manufacturing (SZSE:002384) 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)
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. The formula for this calculation on Suzhou Dongshan Precision Manufacturing is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥2.1b ÷ (CN¥46b - CN¥20b) (Based on the trailing twelve months to September 2023).
So, Suzhou Dongshan Precision Manufacturing has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.
In the above chart we have measured Suzhou Dongshan Precision Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Suzhou Dongshan Precision Manufacturing for free.
So How Is Suzhou Dongshan Precision Manufacturing's ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 110%. Usually this isn't ideal, but given Suzhou Dongshan Precision Manufacturing conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Suzhou Dongshan Precision Manufacturing probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a related note, Suzhou Dongshan Precision Manufacturing has decreased its current liabilities to 44% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
The Bottom Line On Suzhou Dongshan Precision Manufacturing's ROCE
To conclude, we've found that Suzhou Dongshan Precision Manufacturing is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know about the risks facing Suzhou Dongshan Precision Manufacturing, we've discovered 2 warning signs that you should be aware of.
While Suzhou Dongshan Precision Manufacturing 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.