Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shenyang Fortune Precision Equipment (SHSE:688409) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. 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)
0.02 = CN¥118m ÷ (CN¥6.9b - CN¥922m) (Based on the trailing twelve months to June 2023).
Therefore, Shenyang Fortune Precision Equipment has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.2%.
Check out our latest analysis for Shenyang Fortune Precision Equipment
In the above chart we have measured Shenyang Fortune Precision Equipment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Shenyang Fortune Precision Equipment has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 2.0% on its capital. In addition to that, Shenyang Fortune Precision Equipment is employing 884% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In Conclusion...
In summary, it's great to see that Shenyang Fortune Precision Equipment has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 43% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenyang Fortune Precision Equipment (of which 1 is concerning!) that you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.