Some Investors May Be Worried About Fortior Technology (Shenzhen)'s (SHSE:688279) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Fortior Technology (Shenzhen) (SHSE:688279) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Fortior Technology (Shenzhen), this is the formula:

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

0.088 = CN¥220m ÷ (CN¥2.6b - CN¥46m) (Based on the trailing twelve months to December 2024).

Therefore, Fortior Technology (Shenzhen) has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.7%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out 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 49% over the last five years. 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.

On a side note, Fortior Technology (Shenzhen) has done well to pay down its current liabilities to 1.8% 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. 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.

Our Take On Fortior Technology (Shenzhen)'s ROCE

While returns have fallen for Fortior Technology (Shenzhen) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 152% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Fortior Technology (Shenzhen), we've discovered 1 warning sign that you should be aware of.

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.