There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Fujian Yongfu Power EngineeringLtd (SZSE:300712), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Fujian Yongfu Power EngineeringLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.026 = CN¥45m ÷ (CN¥4.6b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

So, Fujian Yongfu Power EngineeringLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 6.5%.

Above you can see how the current ROCE for Fujian Yongfu Power EngineeringLtd 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 analyst report for Fujian Yongfu Power EngineeringLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Fujian Yongfu Power EngineeringLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 6.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Fujian Yongfu Power EngineeringLtd's current liabilities have increased over the last five years to 62% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Fujian Yongfu Power EngineeringLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 96% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 2 warning signs for Fujian Yongfu Power EngineeringLtd you'll probably want to know about.

While Fujian Yongfu Power EngineeringLtd 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.