Shenzhen Fuanna Bedding and FurnishingLtd (SZSE:002327) Has More To Do To Multiply In Value Going Forward

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Shenzhen Fuanna Bedding and FurnishingLtd (SZSE:002327) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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¥625m ÷ (CN¥4.9b - CN¥784m) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Fuanna Bedding and FurnishingLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 6.5% it's much better.

View 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're interested, you can view the analysts predictions in our free analyst report for Shenzhen Fuanna Bedding and FurnishingLtd .

So How Is Shenzhen Fuanna Bedding and FurnishingLtd's ROCE Trending?

There hasn't been much to report for Shenzhen Fuanna Bedding and FurnishingLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's 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.

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. Although the market must be expecting these trends to improve because the stock has gained 98% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Shenzhen Fuanna Bedding and FurnishingLtd you'll probably want to know about.

While Shenzhen Fuanna Bedding and FurnishingLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.