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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Suzhou Secote Precision ElectronicLTD's (SHSE:603283) returns on capital, so let's have a look.

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. The formula for this calculation on Suzhou Secote Precision ElectronicLTD is:

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

0.31 = CN¥954m ÷ (CN¥6.2b - CN¥3.1b) (Based on the trailing twelve months to September 2024).

So, Suzhou Secote Precision ElectronicLTD has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Machinery industry average of 5.4%.

Above you can see how the current ROCE for Suzhou Secote Precision ElectronicLTD 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 Secote Precision ElectronicLTD .

The Trend Of ROCE

Investors would be pleased with what's happening at Suzhou Secote Precision ElectronicLTD. Over the last five years, returns on capital employed have risen substantially to 31%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 192%. So we're very much inspired by what we're seeing at Suzhou Secote Precision ElectronicLTD thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Suzhou Secote Precision ElectronicLTD has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's great to see that Suzhou Secote Precision ElectronicLTD can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 173% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Suzhou Secote Precision ElectronicLTD can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Suzhou Secote Precision ElectronicLTD you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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