Here's What's Concerning About Shenzhen FRD Science & Technology's (SZSE:300602) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Shenzhen FRD Science & Technology (SZSE:300602) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Shenzhen FRD Science & Technology, this is the formula:

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

0.037 = CN¥169m ÷ (CN¥7.1b - CN¥2.5b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen FRD Science & Technology has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Shenzhen FRD Science & Technology

Above you can see how the current ROCE for Shenzhen FRD Science & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen FRD Science & Technology for free.

So How Is Shenzhen FRD Science & Technology's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 215%. That being said, Shenzhen FRD Science & Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shenzhen FRD Science & Technology's earnings and if they change as a result from the capital raise.

Our Take On Shenzhen FRD Science & Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen FRD Science & Technology's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in Shenzhen FRD Science & Technology it's worth checking out our FREE intrinsic value approximation for 300602 to see if it's trading at an attractive price in other respects.

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