Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Suzhou Shijing Environmental TechnologyLtd (SZSE:301030) looks decent, right now, so lets see what the trend of returns can tell us.
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 Shijing Environmental TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥356m ÷ (CN¥8.4b - CN¥5.0b) (Based on the trailing twelve months to March 2024).
So, Suzhou Shijing Environmental TechnologyLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.
In the above chart we have measured Suzhou Shijing Environmental TechnologyLtd'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 analyst report for Suzhou Shijing Environmental TechnologyLtd .
So How Is Suzhou Shijing Environmental TechnologyLtd's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 388% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Suzhou Shijing Environmental TechnologyLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 60% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 60% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.
The Bottom Line
The main thing to remember is that Suzhou Shijing Environmental TechnologyLtd has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 47% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
Suzhou Shijing Environmental TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...
While Suzhou Shijing Environmental TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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