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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, Zhangjiagang Furui Special Equipment (SZSE:300228) 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 Zhangjiagang Furui Special Equipment, this is the formula:

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

0.13 = CN¥268m ÷ (CN¥4.4b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

Therefore, Zhangjiagang Furui Special Equipment has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

Check out 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're interested in investigating Zhangjiagang Furui Special Equipment's past further, check out this free graph covering Zhangjiagang Furui Special Equipment's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Zhangjiagang Furui Special Equipment is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 432% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Zhangjiagang Furui Special Equipment's current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. 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

To sum it up, Zhangjiagang Furui Special Equipment is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.7% to shareholders. So with that in mind, we think the stock deserves further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 300228 that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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