Returns On Capital Are Showing Encouraging Signs At Fujian Yongan Forestry(Group)Ltd (SZSE:000663)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Fujian Yongan Forestry(Group)Ltd (SZSE:000663) so let's look a bit deeper.

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. The formula for this calculation on Fujian Yongan Forestry(Group)Ltd is:

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

0.14 = CN¥182m ÷ (CN¥1.6b - CN¥312m) (Based on the trailing twelve months to March 2024).

So, Fujian Yongan Forestry(Group)Ltd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 6.3% it's much better.

Check out our latest analysis for Fujian Yongan Forestry(Group)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Yongan Forestry(Group)Ltd's ROCE against it's prior returns. If you'd like to look at how Fujian Yongan Forestry(Group)Ltd has performed in the past in other metrics, you can view this free graph of Fujian Yongan Forestry(Group)Ltd's past earnings, revenue and cash flow.

So How Is Fujian Yongan Forestry(Group)Ltd's ROCE Trending?

We're delighted to see that Fujian Yongan Forestry(Group)Ltd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Fujian Yongan Forestry(Group)Ltd is utilizing 38% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Fujian Yongan Forestry(Group)Ltd's ROCE

Long story short, we're delighted to see that Fujian Yongan Forestry(Group)Ltd's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 26% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for Fujian Yongan Forestry(Group)Ltd (1 is significant) you should be aware of.

While Fujian Yongan Forestry(Group)Ltd 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.