Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Suzhou SLAC Precision EquipmentLtd (SZSE:300382), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Suzhou SLAC Precision EquipmentLtd is:

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

0.033 = CN¥119m ÷ (CN¥4.5b - CN¥932m) (Based on the trailing twelve months to March 2024).

Therefore, Suzhou SLAC Precision EquipmentLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou SLAC Precision EquipmentLtd's ROCE against it's prior returns. If you'd like to look at how Suzhou SLAC Precision EquipmentLtd has performed in the past in other metrics, you can view this free graph of Suzhou SLAC Precision EquipmentLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Suzhou SLAC Precision EquipmentLtd Tell Us?

On the surface, the trend of ROCE at Suzhou SLAC Precision EquipmentLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Suzhou SLAC Precision EquipmentLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Suzhou SLAC Precision EquipmentLtd has done well to pay down its current liabilities to 21% 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.

Our Take On Suzhou SLAC Precision EquipmentLtd's ROCE

In summary, Suzhou SLAC Precision EquipmentLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Suzhou SLAC Precision EquipmentLtd, we've discovered 2 warning signs that you should be aware of.

While Suzhou SLAC Precision EquipmentLtd 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.