If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shenyang Fortune Precision Equipment's (SHSE:688409) returns on capital, so let's have a look.
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 Shenyang Fortune Precision Equipment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥160m ÷ (CN¥7.7b - CN¥1.2b) (Based on the trailing twelve months to June 2024).
Therefore, Shenyang Fortune Precision Equipment has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.
Above you can see how the current ROCE for Shenyang Fortune Precision Equipment 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 analyst report for Shenyang Fortune Precision Equipment .
The Trend Of ROCE
The fact that Shenyang Fortune Precision Equipment is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Shenyang Fortune Precision Equipment is utilizing 970% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Shenyang Fortune Precision Equipment's ROCE
Overall, Shenyang Fortune Precision Equipment gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know more about Shenyang Fortune Precision Equipment, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.
While Shenyang Fortune Precision Equipment 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.
