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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Fujian Yuanli Active CarbonLtd (SZSE:300174), it didn't seem to tick all of these boxes.
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. 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)
0.071 = CN¥236m ÷ (CN¥3.9b - CN¥527m) (Based on the trailing twelve months to March 2024).
Thus, Fujian Yuanli Active CarbonLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.
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 for free.
The Trend Of ROCE
The returns on capital haven't changed much for Fujian Yuanli Active CarbonLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 278% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Fujian Yuanli Active CarbonLtd has done well to reduce current liabilities to 14% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Key Takeaway
In summary, Fujian Yuanli Active CarbonLtd has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you're still interested in Fujian Yuanli Active CarbonLtd it's worth checking out our FREE intrinsic value approximation for 300174 to see if it's trading at an attractive price in other respects.
While Fujian Yuanli Active CarbonLtd isn't earning the highest return, check out this free list of companies that are 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.