There Are Reasons To Feel Uneasy About Fujian Tianma Science and Technology Group's (SHSE:603668) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Fujian Tianma Science and Technology Group (SHSE:603668), we don't think it's current trends fit the mold of a multi-bagger.

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 Fujian Tianma Science and Technology Group is:

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

0.024 = CN¥100m ÷ (CN¥8.8b - CN¥4.7b) (Based on the trailing twelve months to June 2024).

So, Fujian Tianma Science and Technology Group has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

See our latest analysis for Fujian Tianma Science and Technology Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fujian Tianma Science and Technology Group.

What Can We Tell From Fujian Tianma Science and Technology Group's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 9.5% five years ago, while capital employed has grown 236%. Usually this isn't ideal, but given Fujian Tianma Science and Technology Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Fujian Tianma Science and Technology Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that Fujian Tianma Science and Technology Group has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Fujian Tianma Science and Technology Group's ROCE

In summary, Fujian Tianma Science and Technology Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 46% 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.

One more thing: We've identified 4 warning signs with Fujian Tianma Science and Technology Group (at least 3 which are a bit concerning) , and understanding them would certainly be useful.

While Fujian Tianma Science and Technology Group 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.