Return Trends At Shenzhen Fuanna Bedding and FurnishingLtd (SZSE:002327) Aren't Appealing

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Shenzhen Fuanna Bedding and FurnishingLtd (SZSE:002327) and its ROCE trend, we weren't exactly thrilled.

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

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 Shenzhen Fuanna Bedding and FurnishingLtd is:

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

0.15 = CN¥582m ÷ (CN¥4.5b - CN¥681m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Fuanna Bedding and FurnishingLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Luxury industry.

See our latest analysis for Shenzhen Fuanna Bedding and FurnishingLtd

In the above chart we have measured Shenzhen Fuanna Bedding and FurnishingLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Fuanna Bedding and FurnishingLtd for free.

What Does the ROCE Trend For Shenzhen Fuanna Bedding and FurnishingLtd Tell Us?

Over the past five years, Shenzhen Fuanna Bedding and FurnishingLtd's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Shenzhen Fuanna Bedding and FurnishingLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why Shenzhen Fuanna Bedding and FurnishingLtd has been paying out 81% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Key Takeaway

In summary, Shenzhen Fuanna Bedding and FurnishingLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 101% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Shenzhen Fuanna Bedding and FurnishingLtd that you might find interesting.

While Shenzhen Fuanna Bedding and FurnishingLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.