Shenzhen Fenda Technology's (SZSE:002681) Returns On Capital Are Heading Higher

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. So on that note, Shenzhen Fenda Technology (SZSE:002681) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Shenzhen Fenda Technology:

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

0.026 = CN¥80m ÷ (CN¥4.5b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Fenda Technology has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.0%.

View 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.

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

It's great to see that Shenzhen Fenda Technology has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Shenzhen Fenda Technology is using 48% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Shenzhen Fenda Technology could be selling under-performing assets since the ROCE is improving.

The Bottom Line

From what we've seen above, Shenzhen Fenda Technology has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 3 warning signs facing Shenzhen Fenda Technology that you might find interesting.

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.