The Returns On Capital At Sanhe Tongfei Refrigeration (SZSE:300990) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Sanhe Tongfei Refrigeration (SZSE:300990) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Sanhe Tongfei Refrigeration:

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

0.082 = CN¥144m ÷ (CN¥2.1b - CN¥378m) (Based on the trailing twelve months to June 2024).

So, Sanhe Tongfei Refrigeration has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

View our latest analysis for Sanhe Tongfei Refrigeration

In the above chart we have measured Sanhe Tongfei Refrigeration's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sanhe Tongfei Refrigeration .

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

When we looked at the ROCE trend at Sanhe Tongfei Refrigeration, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% 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.

Our Take On 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. And the stock has followed suit returning a meaningful 29% 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 identified 3 warning signs with Sanhe Tongfei Refrigeration (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Sanhe Tongfei Refrigeration 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.