Liaoning Fu-An Heavy IndustryLtd (SHSE:603315) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Liaoning Fu-An Heavy IndustryLtd (SHSE:603315) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Liaoning Fu-An Heavy IndustryLtd:

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

0.056 = CN¥87m ÷ (CN¥2.6b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

So, Liaoning Fu-An Heavy IndustryLtd has an ROCE of 5.6%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

See our latest analysis for Liaoning Fu-An Heavy IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Fu-An Heavy IndustryLtd's ROCE against it's prior returns. If you're interested in investigating Liaoning Fu-An Heavy IndustryLtd's past further, check out this free graph covering Liaoning Fu-An Heavy IndustryLtd's past earnings, revenue and cash flow.

What Can We Tell From Liaoning Fu-An Heavy IndustryLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. So we're very much inspired by what we're seeing at Liaoning Fu-An Heavy IndustryLtd thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 41% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Liaoning Fu-An Heavy IndustryLtd's ROCE

To sum it up, Liaoning Fu-An Heavy IndustryLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 19% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Liaoning Fu-An Heavy IndustryLtd (of which 1 is concerning!) that you should know about.

While Liaoning Fu-An Heavy IndustryLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.