Be Wary Of Foshan Blue Rocket ElectronicsLtd (SZSE:301348) And Its 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Foshan Blue Rocket ElectronicsLtd (SZSE:301348) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Foshan Blue Rocket ElectronicsLtd, this is the formula:

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

0.0054 = CN¥8.6m ÷ (CN¥2.0b - CN¥374m) (Based on the trailing twelve months to March 2024).

Thus, Foshan Blue Rocket ElectronicsLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.2%.

Check out our latest analysis for Foshan Blue Rocket ElectronicsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Foshan Blue Rocket ElectronicsLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Foshan Blue Rocket ElectronicsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.5% from 4.1% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Foshan Blue Rocket ElectronicsLtd has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line

In summary, Foshan Blue Rocket ElectronicsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 47% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Foshan Blue Rocket ElectronicsLtd has the makings of a multi-bagger.

If you'd like to know more about Foshan Blue Rocket ElectronicsLtd, we've spotted 5 warning signs, and 3 of them are significant.

While Foshan Blue Rocket ElectronicsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.