Fujian Nanping Sun Cable's (SZSE:002300) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Fujian Nanping Sun Cable (SZSE:002300) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Fujian Nanping Sun Cable is:

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

0.091 = CN¥318m ÷ (CN¥6.6b - CN¥3.1b) (Based on the trailing twelve months to September 2023).

So, Fujian Nanping Sun Cable has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.4% generated by the Electrical industry, it's much better.

See our latest analysis for Fujian Nanping Sun Cable

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Nanping Sun Cable's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fujian Nanping Sun Cable.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fujian Nanping Sun Cable doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Fujian Nanping Sun Cable has done well to pay down its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 47% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Fujian Nanping Sun Cable's ROCE

In summary, Fujian Nanping Sun Cable is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Fujian Nanping Sun Cable has the makings of a multi-bagger.

Fujian Nanping Sun Cable does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Fujian Nanping Sun Cable 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.