Founder Technology GroupLtd (SHSE:600601) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So on that note, Founder Technology GroupLtd (SHSE:600601) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Founder Technology GroupLtd:

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

0.049 = CN¥214m ÷ (CN¥5.7b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

So, Founder Technology GroupLtd has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

View our latest analysis for Founder Technology GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Founder Technology GroupLtd's ROCE against it's prior returns. If you'd like to look at how Founder Technology GroupLtd has performed in the past in other metrics, you can view this free graph of Founder Technology GroupLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Founder Technology GroupLtd Tell Us?

Founder Technology GroupLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 4.9% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, Founder Technology GroupLtd is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 30% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 600601 that compares the share price and estimated value.

While Founder Technology GroupLtd 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.