If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Fujian Yuanli Active CarbonLtd (SZSE:300174) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Fujian Yuanli Active CarbonLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CN¥221m ÷ (CN¥4.0b - CN¥520m) (Based on the trailing twelve months to September 2023).
Thus, Fujian Yuanli Active CarbonLtd has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.
See our latest analysis for Fujian Yuanli Active CarbonLtd
In the above chart we have measured Fujian Yuanli Active CarbonLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fujian Yuanli Active CarbonLtd here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Fujian Yuanli Active CarbonLtd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Fujian Yuanli Active CarbonLtd has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Fujian Yuanli Active CarbonLtd's ROCE
To conclude, we've found that Fujian Yuanli Active CarbonLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 24% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know more about Fujian Yuanli Active CarbonLtd, we've spotted 2 warning signs, and 1 of them is significant.
While Fujian Yuanli Active CarbonLtd 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.