If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Suzhou K-Hiragawa Electronic Technology (SHSE:603052), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Suzhou K-Hiragawa Electronic Technology, this is the formula:

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

0.084 = CN¥95m ÷ (CN¥1.5b - CN¥410m) (Based on the trailing twelve months to September 2023).

Thus, Suzhou K-Hiragawa Electronic Technology has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic 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'd like to look at how Suzhou K-Hiragawa Electronic Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Suzhou K-Hiragawa Electronic Technology Tell Us?

When we looked at the ROCE trend at Suzhou K-Hiragawa Electronic Technology, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 8.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Suzhou K-Hiragawa Electronic Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Suzhou K-Hiragawa Electronic Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Suzhou K-Hiragawa Electronic Technology, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Suzhou K-Hiragawa Electronic Technology 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.