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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Fujian Zhangzhou DevelopmentLTD (SZSE:000753) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fujian Zhangzhou DevelopmentLTD:

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

0.008 = CN¥49m ÷ (CN¥11b - CN¥4.6b) (Based on the trailing twelve months to September 2024).

Therefore, Fujian Zhangzhou DevelopmentLTD has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 4.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Zhangzhou DevelopmentLTD's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fujian Zhangzhou DevelopmentLTD.

What Can We Tell From Fujian Zhangzhou DevelopmentLTD's ROCE Trend?

On the surface, the trend of ROCE at Fujian Zhangzhou DevelopmentLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 4.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Fujian Zhangzhou DevelopmentLTD has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

While returns have fallen for Fujian Zhangzhou DevelopmentLTD in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Fujian Zhangzhou DevelopmentLTD does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Fujian Zhangzhou DevelopmentLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.