If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shenzhen FRD Science & Technology (SZSE:300602), it didn't seem to tick all of these boxes.
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. To calculate this metric for Shenzhen FRD Science & Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CN¥64m ÷ (CN¥7.3b - CN¥2.4b) (Based on the trailing twelve months to September 2023).
Thus, Shenzhen FRD Science & Technology has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.
View our latest analysis for Shenzhen FRD Science & Technology
Above you can see how the current ROCE for Shenzhen FRD Science & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhen FRD Science & Technology.
The Trend Of ROCE
We weren't thrilled with the trend because Shenzhen FRD Science & Technology's ROCE has reduced by 91% over the last five years, while the business employed 274% more capital. That being said, Shenzhen FRD Science & Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shenzhen FRD Science & Technology might not have received a full period of earnings contribution from it.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
What We Can Learn From Shenzhen FRD Science & Technology's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen FRD Science & Technology. In light of this, the stock has only gained 13% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Shenzhen FRD Science & Technology does have some risks though, and we've spotted 3 warning signs for Shenzhen FRD Science & Technology that you might be interested in.
While Shenzhen FRD Science & Technology 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.
