There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Suzhou Alton Electrical & Mechanical Industry, this is the formula:

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

0.075 = CN¥116m ÷ (CN¥2.2b - CN¥669m) (Based on the trailing twelve months to September 2023).

Thus, Suzhou Alton Electrical & Mechanical Industry has an ROCE of 7.5%. On its own, that's a low figure but it's around the 8.2% average generated by the Consumer Durables industry.

Above you can see how the current ROCE for Suzhou Alton Electrical & Mechanical Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Alton Electrical & Mechanical Industry .

What Does the ROCE Trend For Suzhou Alton Electrical & Mechanical Industry Tell Us?

On the surface, the trend of ROCE at Suzhou Alton Electrical & Mechanical Industry doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 7.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 related note, Suzhou Alton Electrical & Mechanical Industry has decreased its current liabilities to 30% 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. 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.

What We Can Learn From Suzhou Alton Electrical & Mechanical Industry's ROCE

In summary, we're somewhat concerned by Suzhou Alton Electrical & Mechanical Industry's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Suzhou Alton Electrical & Mechanical Industry, we've spotted 3 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.