Fortior Technology (Shenzhen) (SHSE:688279) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Fortior Technology (Shenzhen) (SHSE:688279) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Fortior Technology (Shenzhen):

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

0.072 = CN¥170m ÷ (CN¥2.4b - CN¥87m) (Based on the trailing twelve months to December 2023).

Therefore, Fortior Technology (Shenzhen) has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.2%.

See our latest analysis for Fortior Technology (Shenzhen)

In the above chart we have measured Fortior Technology (Shenzhen)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fortior Technology (Shenzhen) .

So How Is Fortior Technology (Shenzhen)'s ROCE Trending?

When we looked at the ROCE trend at Fortior Technology (Shenzhen), we didn't gain much confidence. To be more specific, ROCE has fallen from 49% over the last four years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Fortior Technology (Shenzhen) has decreased its current liabilities to 3.6% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fortior Technology (Shenzhen). And the stock has followed suit returning a meaningful 17% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in Fortior Technology (Shenzhen) it's worth checking out our FREE intrinsic value approximation for 688279 to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.