What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Suzhou Recodeal Interconnect SystemLtd (SHSE:688800) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Suzhou Recodeal Interconnect SystemLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = CN¥156m ÷ (CN¥3.3b - CN¥1.2b) (Based on the trailing twelve months to December 2023).
Therefore, Suzhou Recodeal Interconnect SystemLtd has an ROCE of 7.4%. On its own, that's a low figure but it's around the 6.3% average generated by the Electrical industry.
In the above chart we have measured Suzhou Recodeal Interconnect SystemLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Recodeal Interconnect SystemLtd .
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Suzhou Recodeal Interconnect SystemLtd. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 354% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Suzhou Recodeal Interconnect SystemLtd's ROCE
In summary, Suzhou Recodeal Interconnect SystemLtd has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 60% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Like most companies, Suzhou Recodeal Interconnect SystemLtd does come with some risks, and we've found 3 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.