To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Suzhou Chunqiu Electronic Technology (SHSE:603890), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Suzhou Chunqiu Electronic Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0023 = CN¥8.6m ÷ (CN¥5.7b - CN¥1.9b) (Based on the trailing twelve months to September 2023).
So, Suzhou Chunqiu Electronic Technology has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.
Check out our latest analysis for Suzhou Chunqiu Electronic Technology
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 want to delve into the historical earnings, revenue and cash flow of Suzhou Chunqiu Electronic Technology, check out these free graphs here.
How Are Returns Trending?
In terms of Suzhou Chunqiu Electronic Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 0.2%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
On a side note, Suzhou Chunqiu Electronic Technology has done well to pay down its current liabilities to 34% 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.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Suzhou Chunqiu Electronic Technology have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 66% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Suzhou Chunqiu Electronic Technology does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
While Suzhou Chunqiu 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.
