Capital Allocation Trends At Ferrotec (An Hui) Technology DevelopmentLTD (SZSE:301297) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Ferrotec (An Hui) Technology DevelopmentLTD (SZSE:301297) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ferrotec (An Hui) Technology DevelopmentLTD is:

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

0.055 = CN¥82m ÷ (CN¥1.7b - CN¥156m) (Based on the trailing twelve months to March 2024).

Therefore, Ferrotec (An Hui) Technology DevelopmentLTD has an ROCE of 5.5%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

View our latest analysis for Ferrotec (An Hui) Technology DevelopmentLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ferrotec (An Hui) Technology DevelopmentLTD's ROCE against it's prior returns. If you're interested in investigating Ferrotec (An Hui) Technology DevelopmentLTD's past further, check out this free graph covering Ferrotec (An Hui) Technology DevelopmentLTD's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ferrotec (An Hui) Technology DevelopmentLTD's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 15% five years ago. However it looks like Ferrotec (An Hui) Technology DevelopmentLTD might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ferrotec (An Hui) Technology DevelopmentLTD has done well to pay down its current liabilities to 9.4% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Ferrotec (An Hui) Technology DevelopmentLTD's ROCE

Bringing it all together, while we're somewhat encouraged by Ferrotec (An Hui) Technology DevelopmentLTD's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Ferrotec (An Hui) Technology DevelopmentLTD, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.