What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Neway CNC Equipment (Suzhou) (SHSE:688697), we liked what we saw.

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 Neway CNC Equipment (Suzhou), this is the formula:

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

0.23 = CN¥350m ÷ (CN¥3.6b - CN¥2.1b) (Based on the trailing twelve months to December 2023).

Therefore, Neway CNC Equipment (Suzhou) has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Machinery industry average of 6.0%.

Above you can see how the current ROCE for Neway CNC Equipment (Suzhou) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Neway CNC Equipment (Suzhou) .

What Can We Tell From Neway CNC Equipment (Suzhou)'s ROCE Trend?

Neway CNC Equipment (Suzhou) deserves to be commended in regards to it's returns. The company has employed 399% more capital in the last five years, and the returns on that capital have remained stable at 23%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 57% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

In Conclusion...

Neway CNC Equipment (Suzhou) has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Yet over the last year the stock has declined 25%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you'd like to know about the risks facing Neway CNC Equipment (Suzhou), we've discovered 2 warning signs that you should be aware of.

Neway CNC Equipment (Suzhou) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.