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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Foryou's (SZSE:002906) returns on capital, so let's have a look.
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. The formula for this calculation on Foryou is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = CN¥351m ÷ (CN¥8.9b - CN¥2.9b) (Based on the trailing twelve months to September 2023).
Therefore, Foryou has an ROCE of 5.8%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.
In the above chart we have measured Foryou'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 analyst report for Foryou .
What Can We Tell From Foryou's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 75% more capital is being employed now too. So we're very much inspired by what we're seeing at Foryou thanks to its ability to profitably reinvest capital.
The Bottom Line On Foryou's ROCE
All in all, it's terrific to see that Foryou is reaping the rewards from prior investments and is growing its capital base. And a remarkable 123% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Foryou does come with some risks, and we've found 2 warning signs that you should be aware of.
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.