Fujian Yongfu Power EngineeringLtd (SZSE:300712) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Fujian Yongfu Power EngineeringLtd (SZSE:300712) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Fujian Yongfu Power EngineeringLtd, this is the formula:

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

0.026 = CN¥45m ÷ (CN¥4.6b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Thus, Fujian Yongfu Power EngineeringLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 6.0%.

Check out our latest analysis for Fujian Yongfu Power EngineeringLtd

In the above chart we have measured Fujian Yongfu Power EngineeringLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fujian Yongfu Power EngineeringLtd .

So How Is Fujian Yongfu Power EngineeringLtd's ROCE Trending?

When we looked at the ROCE trend at Fujian Yongfu Power EngineeringLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.5% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Fujian Yongfu Power EngineeringLtd's current liabilities have increased over the last five years to 62% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fujian Yongfu Power EngineeringLtd. And long term investors must be optimistic going forward because the stock has returned a huge 156% to shareholders in the last five 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 Fujian Yongfu Power EngineeringLtd (at least 2 which can't be ignored) , and understanding these would certainly be useful.

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.