If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong Fenghua Advanced Technology (Holding) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.003 = CN¥39m ÷ (CN¥16b - CN¥2.6b) (Based on the trailing twelve months to March 2024).
Thus, Guangdong Fenghua Advanced Technology (Holding) has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.
In the above chart we have measured Guangdong Fenghua Advanced Technology (Holding)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangdong Fenghua Advanced Technology (Holding) for free.
So How Is Guangdong Fenghua Advanced Technology (Holding)'s ROCE Trending?
In terms of Guangdong Fenghua Advanced Technology (Holding)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Guangdong Fenghua Advanced Technology (Holding)'s ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Fenghua Advanced Technology (Holding) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.6% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Guangdong Fenghua Advanced Technology (Holding) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 000636 on our platform quite valuable.
While Guangdong Fenghua Advanced Technology (Holding) 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.