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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Suntront Technology (SZSE:300259) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Suntront Technology is:

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

0.067 = CN¥194m ÷ (CN¥3.3b - CN¥448m) (Based on the trailing twelve months to September 2024).

Thus, Suntront Technology has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

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

So How Is Suntront Technology's ROCE Trending?

When we looked at the ROCE trend at Suntront Technology, we didn't gain much confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 6.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Suntront Technology's ROCE

We're a bit apprehensive about Suntront Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Suntront Technology that you might find interesting.

While Suntront 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.