Shenzhen Fenda Technology (SZSE:002681) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Shenzhen Fenda Technology (SZSE:002681) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Shenzhen Fenda Technology, this is the formula:

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

0.031 = CN¥102m ÷ (CN¥4.7b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Fenda Technology has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.4%.

Check out our latest analysis for Shenzhen Fenda Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Fenda Technology'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 Shenzhen Fenda Technology.

What Can We Tell From Shenzhen Fenda Technology's ROCE Trend?

We're delighted to see that Shenzhen Fenda Technology is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.1% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 45%. Shenzhen Fenda Technology could be selling under-performing assets since the ROCE is improving.

The Bottom Line

In a nutshell, we're pleased to see that Shenzhen Fenda Technology has been able to generate higher returns from less capital. Given the stock has declined 10% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Shenzhen Fenda Technology you'll probably want to know about.

While Shenzhen Fenda Technology 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.