Shareholders Are Optimistic That Xiamen Faratronic (SHSE:600563) Will Multiply In Value

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Xiamen Faratronic's (SHSE:600563) trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Xiamen Faratronic is:

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

0.22 = CN¥1.1b ÷ (CN¥7.3b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Xiamen Faratronic has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electronic industry average of 5.8%.

See our latest analysis for Xiamen Faratronic

Above you can see how the current ROCE for Xiamen Faratronic 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 Xiamen Faratronic .

What Does the ROCE Trend For Xiamen Faratronic Tell Us?

It's hard not to be impressed by Xiamen Faratronic's returns on capital. The company has employed 108% more capital in the last five years, and the returns on that capital have remained stable at 22%. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Xiamen Faratronic can keep this up, we'd be very optimistic about its future.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 27% of total assets, this reported ROCE would probably be less than22% because total capital employed would be higher.The 22% ROCE could be even lower if current liabilities weren't 27% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

Xiamen Faratronic has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 132% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600563 on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.