Returns At Ningbo Fujia Industrial (SHSE:603219) Appear To Be Weighed Down

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Ningbo Fujia Industrial's (SHSE:603219) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ningbo Fujia Industrial is:

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

0.17 = CN¥274m ÷ (CN¥2.8b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Ningbo Fujia Industrial has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Consumer Durables industry.

See our latest analysis for Ningbo Fujia Industrial

In the above chart we have measured Ningbo Fujia Industrial'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 Ningbo Fujia Industrial .

What Does the ROCE Trend For Ningbo Fujia Industrial Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 179% more capital into its operations. 17% is a pretty standard return, and it provides some comfort knowing that Ningbo Fujia Industrial has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Ningbo Fujia Industrial has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Ningbo Fujia Industrial's ROCE

In the end, Ningbo Fujia Industrial has proven its ability to adequately reinvest capital at good rates of return. However, over the last year, the stock has only delivered a 6.6% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Ningbo Fujia Industrial and understanding it should be part of your investment process.

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.