Sichuan Furong Technology (SHSE:603327) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Sichuan Furong Technology (SHSE:603327) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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 6.8%.

Check out our latest analysis for Sichuan Furong Technology

In the above chart we have measured Sichuan Furong Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sichuan Furong Technology .

The Trend Of ROCE

When we looked at the ROCE trend at Sichuan Furong Technology, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 6.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Sichuan Furong Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sichuan Furong Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 1.8% gain to shareholders who've held 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 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Sichuan Furong Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.