Fujian South Highway Machinery (SHSE:603280) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Fujian South Highway Machinery (SHSE:603280), it didn't seem to tick all of these boxes.

What Is 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 South Highway Machinery:

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

0.066 = CN¥82m ÷ (CN¥2.1b - CN¥882m) (Based on the trailing twelve months to September 2023).

Thus, Fujian South Highway Machinery has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.0%.

View our latest analysis for Fujian South Highway Machinery

In the above chart we have measured Fujian South Highway Machinery'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 South Highway Machinery for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fujian South Highway Machinery doesn't inspire confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 6.6%. However it looks like Fujian South Highway Machinery might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Fujian South Highway Machinery has decreased its current liabilities to 42% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Fujian South Highway Machinery's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Fujian South Highway Machinery does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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.