Returns On Capital At Sichuan Furong Technology (SHSE:603327) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sichuan Furong Technology (SHSE:603327) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Sichuan Furong Technology:

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

0.061 = CN¥168m ÷ (CN¥3.3b - CN¥511m) (Based on the trailing twelve months to September 2024).

Therefore, Sichuan Furong Technology has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.9%.

See our latest analysis for Sichuan Furong Technology

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're interested in investigating Sichuan Furong Technology's past further, check out this free graph covering Sichuan Furong Technology's past earnings, revenue and cash flow.

What Can We Tell From Sichuan Furong Technology's ROCE Trend?

On the surface, the trend of ROCE at Sichuan Furong Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 24% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Sichuan Furong Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sichuan Furong Technology. In light of this, the stock has only gained 4.8% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Sichuan Furong Technology we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Sichuan Furong Technology 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.