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. 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 SONAVOX ElectronicsLtd (SHSE:688533), we don't think it's current trends fit the mold of a multi-bagger.

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

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 SONAVOX ElectronicsLtd, this is the formula:

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

0.075 = CN¥138m ÷ (CN¥2.8b - CN¥925m) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou SONAVOX ElectronicsLtd has an ROCE of 7.5%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

In the above chart we have measured Suzhou SONAVOX ElectronicsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Suzhou SONAVOX ElectronicsLtd here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Suzhou SONAVOX ElectronicsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.5% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Suzhou SONAVOX ElectronicsLtd has decreased its current liabilities to 34% 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 SONAVOX ElectronicsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Suzhou SONAVOX ElectronicsLtd. These growth trends haven't led to growth returns though, since the stock has fallen 55% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Suzhou SONAVOX ElectronicsLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Suzhou SONAVOX ElectronicsLtd 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.