If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ferrotec (An Hui) Technology DevelopmentLTD (SZSE:301297), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ferrotec (An Hui) Technology DevelopmentLTD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = CN¥79m ÷ (CN¥1.7b - CN¥187m) (Based on the trailing twelve months to September 2023).
Therefore, Ferrotec (An Hui) Technology DevelopmentLTD has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.
View our latest analysis for Ferrotec (An Hui) Technology DevelopmentLTD
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ferrotec (An Hui) Technology DevelopmentLTD's ROCE against it's prior returns. If you're interested in investigating Ferrotec (An Hui) Technology DevelopmentLTD's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Ferrotec (An Hui) Technology DevelopmentLTD's ROCE Trend?
In terms of Ferrotec (An Hui) Technology DevelopmentLTD's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 15%, but since then they've fallen to 5.4%. However it looks like Ferrotec (An Hui) Technology DevelopmentLTD might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
On a side note, Ferrotec (An Hui) Technology DevelopmentLTD has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Ferrotec (An Hui) Technology DevelopmentLTD's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 57% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know about the risks facing Ferrotec (An Hui) Technology DevelopmentLTD, we've discovered 1 warning sign that you should be aware of.
While Ferrotec (An Hui) Technology DevelopmentLTD 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.
