There Are Reasons To Feel Uneasy About Ferrotec (An Hui) Technology DevelopmentLTD's (SZSE:301297) Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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.

Return On Capital Employed (ROCE): What Is It?

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 Ferrotec (An Hui) Technology DevelopmentLTD, this is the formula:

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

0.054 = CN¥79m ÷ (CN¥1.7b - CN¥187m) (Based on the trailing twelve months to September 2023).

Therefore, Ferrotec (An Hui) Technology DevelopmentLTD has an ROCE of 5.4%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ferrotec (An Hui) Technology DevelopmentLTD.

How Are Returns Trending?

In terms of Ferrotec (An Hui) Technology DevelopmentLTD's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 11% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, Ferrotec (An Hui) Technology DevelopmentLTD is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 19% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Ferrotec (An Hui) Technology DevelopmentLTD could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 301297 on our platform quite valuable.

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.