Here's What's Concerning About Fortior Technology (Shenzhen)'s (SHSE:688279) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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.

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 Fortior Technology (Shenzhen):

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

0.054 = CN¥133m ÷ (CN¥2.5b - CN¥72m) (Based on the trailing twelve months to June 2024).

So, Fortior Technology (Shenzhen) has an ROCE of 5.4%. On its own that's a low return, but compared to the average of 4.3% generated by the Semiconductor industry, it's much better.

See our latest analysis for Fortior Technology (Shenzhen)

Above you can see how the current ROCE for Fortior Technology (Shenzhen) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fortior Technology (Shenzhen) .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fortior Technology (Shenzhen) doesn't inspire confidence. To be more specific, ROCE has fallen from 38% over the last five 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 side note, Fortior Technology (Shenzhen) has done well to pay down its current liabilities to 2.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Fortior Technology (Shenzhen)'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 Fortior Technology (Shenzhen). In light of this, the stock has only gained 6.5% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Fortior Technology (Shenzhen) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688279 on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.