Some Investors May Be Worried About Shanghai Fengyuzhu Culture Technology's (SHSE:603466) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shanghai Fengyuzhu Culture Technology (SHSE:603466), it didn't seem to tick all of these boxes.

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

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 Fengyuzhu Culture Technology, this is the formula:

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

0.04 = CN¥120m ÷ (CN¥4.7b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Fengyuzhu Culture Technology has an ROCE of 4.0%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

View our latest analysis for Shanghai Fengyuzhu Culture Technology

Above you can see how the current ROCE for Shanghai Fengyuzhu Culture Technology 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 Fengyuzhu Culture Technology .

What Can We Tell From Shanghai Fengyuzhu Culture Technology's ROCE Trend?

On the surface, the trend of ROCE at Shanghai Fengyuzhu Culture Technology doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.0%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shanghai Fengyuzhu Culture Technology has done well to pay down its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shanghai Fengyuzhu Culture 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 Shanghai Fengyuzhu Culture Technology. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Shanghai Fengyuzhu Culture Technology (at least 1 which is concerning) , and understanding them would certainly be useful.

While Shanghai Fengyuzhu Culture 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.