Far East Smarter Energy (SHSE:600869) Hasn't Managed To Accelerate Its Returns

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Far East Smarter Energy (SHSE:600869) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Far East Smarter Energy, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.08 = CN¥515m ÷ (CN¥21b - CN¥15b) (Based on the trailing twelve months to March 2024).

Therefore, Far East Smarter Energy has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.0%.

View our latest analysis for Far East Smarter Energy

In the above chart we have measured Far East Smarter Energy'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 Far East Smarter Energy .

How Are Returns Trending?

Over the past five years, Far East Smarter Energy's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Far East Smarter Energy in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 69% of total assets, this reported ROCE would probably be less than8.0% because total capital employed would be higher.The 8.0% ROCE could be even lower if current liabilities weren't 69% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Far East Smarter Energy's ROCE

We can conclude that in regards to Far East Smarter Energy's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 5 warning signs with Far East Smarter Energy (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Far East Smarter Energy 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com