What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Fujian Star-net Communication (SZSE:002396) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Fujian Star-net Communication is:

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

0.014 = CN¥133m ÷ (CN¥15b - CN¥5.3b) (Based on the trailing twelve months to September 2023).

Therefore, Fujian Star-net Communication has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 5.1%.

View our latest analysis for Fujian Star-net Communication

Above you can see how the current ROCE for Fujian Star-net Communication compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fujian Star-net Communication here for free.

What Does the ROCE Trend For Fujian Star-net Communication Tell Us?

When we looked at the ROCE trend at Fujian Star-net Communication, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Fujian Star-net Communication's ROCE

To conclude, we've found that Fujian Star-net Communication is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 3.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 3 warning signs with Fujian Star-net Communication and understanding them should be part of your investment process.

While Fujian Star-net Communication 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.