Some Investors May Be Worried About Sanhe Tongfei Refrigeration's (SZSE:300990) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. 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. The formula for this calculation on Sanhe Tongfei Refrigeration is:

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

0.09 = CN¥165m ÷ (CN¥2.1b - CN¥306m) (Based on the trailing twelve months to March 2024).

So, Sanhe Tongfei Refrigeration has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.6%.

See 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 Can We Tell From Sanhe Tongfei Refrigeration's ROCE Trend?

On the surface, the trend of ROCE at Sanhe Tongfei Refrigeration doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 9.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Sanhe Tongfei Refrigeration's ROCE

While returns have fallen for Sanhe Tongfei Refrigeration in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 22% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 4 warning signs for Sanhe Tongfei Refrigeration (1 doesn't sit too well with us) you should be aware of.

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.

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