Returns On Capital Signal Tricky Times Ahead For Shanghai Flyco Electrical Appliance (SHSE:603868)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Shanghai Flyco Electrical Appliance (SHSE:603868) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. The formula for this calculation on Shanghai Flyco Electrical Appliance is:

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

0.24 = CN¥926m ÷ (CN¥4.5b - CN¥663m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Flyco Electrical Appliance has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.

See our latest analysis for Shanghai Flyco Electrical Appliance

In the above chart we have measured Shanghai Flyco Electrical Appliance's prior ROCE against its prior performance, but the future is arguably more important. 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 .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Shanghai Flyco Electrical Appliance's ROCE has reduced by 31% over the last five years, while the business employed 35% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai Flyco Electrical Appliance might not have received a full period of earnings contribution from it.

What We Can Learn From Shanghai Flyco Electrical Appliance's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Flyco Electrical Appliance's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Shanghai Flyco Electrical Appliance you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com