Zhangjiagang Furui Special Equipment (SZSE:300228) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Zhangjiagang Furui Special Equipment (SZSE:300228) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Zhangjiagang Furui Special Equipment, this is the formula:

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

0.16 = CN¥361m ÷ (CN¥4.3b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Therefore, Zhangjiagang Furui Special Equipment has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.3% it's much better.

View our latest analysis for Zhangjiagang Furui Special Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhangjiagang Furui Special Equipment's ROCE against it's prior returns. If you'd like to look at how Zhangjiagang Furui Special Equipment has performed in the past in other metrics, you can view this free graph of Zhangjiagang Furui Special Equipment's past earnings, revenue and cash flow.

So How Is Zhangjiagang Furui Special Equipment's ROCE Trending?

Investors would be pleased with what's happening at Zhangjiagang Furui Special Equipment. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. So we're very much inspired by what we're seeing at Zhangjiagang Furui Special Equipment thanks to its ability to profitably reinvest capital.

On a side note, Zhangjiagang Furui Special Equipment's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhangjiagang Furui Special Equipment's ROCE

In summary, it's great to see that Zhangjiagang Furui Special Equipment can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Zhangjiagang Furui Special Equipment you'll probably want to know about.

While Zhangjiagang Furui Special Equipment 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.