FULONGMA GROUPLtd's (SHSE:603686) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at FULONGMA GROUPLtd (SHSE:603686) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for FULONGMA GROUPLtd:

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

0.095 = CN¥380m ÷ (CN¥6.3b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

Therefore, FULONGMA GROUPLtd has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.6%.

Check out our latest analysis for FULONGMA GROUPLtd

In the above chart we have measured FULONGMA GROUPLtd'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 FULONGMA GROUPLtd for free.

What Can We Tell From FULONGMA GROUPLtd's ROCE Trend?

In terms of FULONGMA GROUPLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.5% for the last five years, and the capital employed within the business has risen 57% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On FULONGMA GROUPLtd's ROCE

As we've seen above, FULONGMA GROUPLtd's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think FULONGMA GROUPLtd has the makings of a multi-bagger.

FULONGMA GROUPLtd does have some risks though, and we've spotted 1 warning sign for FULONGMA GROUPLtd that you might be interested in.

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.

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