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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Shenzhen Fenda Technology's (SZSE:002681) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Fenda Technology is:

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

0.023 = CN¥76m ÷ (CN¥4.6b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Fenda Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

See 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're interested in investigating Shenzhen Fenda Technology's past further, check out this free graph covering Shenzhen Fenda Technology's past earnings, revenue and cash flow.

So How Is Shenzhen Fenda Technology's ROCE Trending?

Like most people, we're pleased that Shenzhen Fenda Technology is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 41%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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. And with a respectable 46% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Shenzhen Fenda Technology can keep these trends up, it could have a bright future ahead.

Shenzhen Fenda Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Shenzhen Fenda Technology 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.