There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Fujian Yongfu Power EngineeringLtd (SZSE:300712), we don't think it's current trends fit the mold of a multi-bagger.
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 Fujian Yongfu Power EngineeringLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥97m ÷ (CN¥3.8b - CN¥2.2b) (Based on the trailing twelve months to September 2023).
Therefore, Fujian Yongfu Power EngineeringLtd has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.
In the above chart we have measured Fujian Yongfu Power EngineeringLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fujian Yongfu Power EngineeringLtd .
What Does the ROCE Trend For Fujian Yongfu Power EngineeringLtd Tell Us?
When we looked at the ROCE trend at Fujian Yongfu Power EngineeringLtd, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Fujian Yongfu Power EngineeringLtd's current liabilities have increased over the last five years to 57% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
Our Take On Fujian Yongfu Power EngineeringLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Fujian Yongfu Power EngineeringLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 86% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One final note, you should learn about the 3 warning signs we've spotted with Fujian Yongfu Power EngineeringLtd (including 1 which doesn't sit too well with us) .
While Fujian Yongfu Power EngineeringLtd 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.