Returns On Capital At Shanghai Flyco Electrical Appliance (SHSE:603868) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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, while the ROCE is currently high for Shanghai Flyco Electrical Appliance (SHSE:603868), we aren't jumping out of our chairs because returns are decreasing.

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. To calculate this metric for Shanghai Flyco Electrical Appliance, this is the formula:

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

0.29 = CN¥1.0b ÷ (CN¥4.3b - CN¥863m) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai Flyco Electrical Appliance has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 9.3%.

See our latest analysis for Shanghai Flyco Electrical Appliance

Above you can see how the current ROCE for Shanghai Flyco Electrical Appliance compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Flyco Electrical Appliance .

So How Is Shanghai Flyco Electrical Appliance's ROCE Trending?

We weren't thrilled with the trend because Shanghai Flyco Electrical Appliance's ROCE has reduced by 32% over the last five years, while the business employed 44% more capital. Usually this isn't ideal, but given Shanghai Flyco Electrical Appliance conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Flyco Electrical Appliance's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

Our Take On Shanghai Flyco Electrical Appliance's ROCE

To conclude, we've found that Shanghai Flyco Electrical Appliance is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Shanghai Flyco Electrical Appliance that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.