There Are Reasons To Feel Uneasy About Shanghai Flyco Electrical Appliance's (SHSE:603868) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.20 = CN¥617m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Flyco Electrical Appliance has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 6.6% earned by companies in a similar industry.

View 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?

When we looked at the ROCE trend at Shanghai Flyco Electrical Appliance, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 35%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Shanghai Flyco Electrical Appliance's ROCE

We're a bit apprehensive about Shanghai Flyco Electrical Appliance because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 40% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shanghai Flyco Electrical Appliance does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

Shanghai Flyco Electrical Appliance is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.