If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Suzhou Veichi Electric (SHSE:688698), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Suzhou Veichi Electric, this is the formula:

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

0.079 = CN¥150m ÷ (CN¥2.5b - CN¥536m) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Veichi Electric has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.3%.

View our latest analysis for Suzhou Veichi Electric

In the above chart we have measured Suzhou Veichi Electric's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Suzhou Veichi Electric's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 732%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Suzhou Veichi Electric's earnings and if they change as a result from the capital raise.

On a side note, Suzhou Veichi Electric has done well to pay down its current liabilities to 22% 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

While returns have fallen for Suzhou Veichi Electric in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 103% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Suzhou Veichi Electric, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Suzhou Veichi Electric 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.