Returns On Capital At Sanhe Tongfei Refrigeration (SZSE:300990) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Sanhe Tongfei Refrigeration (SZSE:300990) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sanhe Tongfei Refrigeration, this is the formula:

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

0.06 = CN¥109m ÷ (CN¥2.2b - CN¥398m) (Based on the trailing twelve months to September 2024).

Therefore, Sanhe Tongfei Refrigeration has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

Check out our latest analysis for Sanhe Tongfei Refrigeration

Above you can see how the current ROCE for Sanhe Tongfei Refrigeration compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sanhe Tongfei Refrigeration .

What The Trend Of ROCE Can Tell Us

In terms of Sanhe Tongfei Refrigeration's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sanhe Tongfei Refrigeration. And the stock has followed suit returning a meaningful 70% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 3 warning signs facing Sanhe Tongfei Refrigeration that you might find interesting.

While Sanhe Tongfei Refrigeration 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.