If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Suzhou Longway Eletronic Machinery (SZSE:301202) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Suzhou Longway Eletronic Machinery, this is the formula:

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

0.073 = CN¥88m ÷ (CN¥1.7b - CN¥483m) (Based on the trailing twelve months to September 2024).

Thus, Suzhou Longway Eletronic Machinery has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.7% generated by the Tech industry, it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Suzhou Longway Eletronic Machinery's past further, check out this free graph covering Suzhou Longway Eletronic Machinery's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Suzhou Longway Eletronic Machinery, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 20% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Suzhou Longway Eletronic Machinery has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On Suzhou Longway Eletronic Machinery's ROCE

While returns have fallen for Suzhou Longway Eletronic Machinery in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 2 warning signs with Suzhou Longway Eletronic Machinery and understanding them should be part of your investment process.

While Suzhou Longway Eletronic Machinery 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.