Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Grace Fabric TechnologyLtd (SHSE:603256) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Grace Fabric TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0016 = CN¥3.1m ÷ (CN¥2.6b - CN¥606m) (Based on the trailing twelve months to September 2024).
So, Grace Fabric TechnologyLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.6%.
Above you can see how the current ROCE for Grace Fabric TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Grace Fabric TechnologyLtd for free.
So How Is Grace Fabric TechnologyLtd's ROCE Trending?
When we looked at the ROCE trend at Grace Fabric TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.0% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Grace Fabric TechnologyLtd's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Grace Fabric TechnologyLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 44% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to continue researching Grace Fabric TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
