Returns On Capital At Shenzhen Fortune Trend technology (SHSE:688318) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shenzhen Fortune Trend technology (SHSE:688318), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Shenzhen Fortune Trend technology:

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

0.067 = CN¥223m ÷ (CN¥3.5b - CN¥177m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Fortune Trend technology has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 2.7% generated by the Software industry, it's much better.

Check out our latest analysis for Shenzhen Fortune Trend technology

In the above chart we have measured Shenzhen Fortune Trend technology'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 Shenzhen Fortune Trend technology .

What Does the ROCE Trend For Shenzhen Fortune Trend technology Tell Us?

When we looked at the ROCE trend at Shenzhen Fortune Trend technology, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 6.7%. 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.

Our Take On Shenzhen Fortune Trend technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Fortune Trend technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 39% over the last three years, it would appear that investors are upbeat about the future. 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.

While Shenzhen Fortune Trend technology doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 688318 on our platform.

While Shenzhen Fortune Trend 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.

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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.