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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So while Shanghai Flyco Electrical Appliance (SHSE:603868) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shanghai Flyco Electrical Appliance:

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

0.20 = CN¥617m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Flyco Electrical Appliance has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 6.9%.

Above you can see how the current ROCE for Shanghai Flyco Electrical Appliance 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 Shanghai Flyco Electrical Appliance for free.

So How Is Shanghai Flyco Electrical Appliance's ROCE Trending?

In terms of Shanghai Flyco Electrical Appliance's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 35%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Shanghai Flyco Electrical Appliance's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shanghai Flyco Electrical Appliance have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Shanghai Flyco Electrical Appliance, we've spotted 2 warning signs, and 1 of them is a bit concerning.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.