We Like These Underlying Return On Capital Trends At Funeng Oriental Equipment Technology (SZSE:300173)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Funeng Oriental Equipment Technology (SZSE:300173) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Funeng Oriental Equipment Technology, this is the formula:

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

0.023 = CN¥32m ÷ (CN¥4.2b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

So, Funeng Oriental Equipment Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.3%.

See our latest analysis for Funeng Oriental Equipment Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Funeng Oriental Equipment Technology's ROCE against it's prior returns. If you're interested in investigating Funeng Oriental Equipment Technology's past further, check out this free graph covering Funeng Oriental Equipment Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

Funeng Oriental Equipment Technology has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Funeng Oriental Equipment Technology is utilizing 35% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Funeng Oriental Equipment Technology's ROCE

In summary, it's great to see that Funeng Oriental Equipment Technology has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Funeng Oriental Equipment Technology we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Funeng Oriental Equipment Technology 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.