What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Far East Smarter Energy's (SHSE:600869) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Far East Smarter Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥854m ÷ (CN¥21b - CN¥15b) (Based on the trailing twelve months to September 2023).
So, Far East Smarter Energy has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Electrical industry.
See our latest analysis for Far East Smarter Energy
Above you can see how the current ROCE for Far East Smarter Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Far East Smarter Energy's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Far East Smarter Energy. The figures show that over the last five years, returns on capital have grown by 111%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 33% less capital than it was five years ago. Far East Smarter Energy may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 72% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Far East Smarter Energy's ROCE
In summary, it's great to see that Far East Smarter Energy has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Far East Smarter Energy, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Far East Smarter Energy 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.
