Returns On Capital Signal Tricky Times Ahead For Fujian Torch Electron Technology (SHSE:603678)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Fujian Torch Electron Technology (SHSE:603678) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Fujian Torch Electron Technology, this is the formula:

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

0.057 = CN¥383m ÷ (CN¥7.9b - CN¥1.2b) (Based on the trailing twelve months to December 2023).

So, Fujian Torch Electron Technology has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.4%.

Check out our latest analysis for Fujian Torch Electron Technology

In the above chart we have measured Fujian Torch Electron Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fujian Torch Electron Technology for free.

The Trend Of ROCE

When we looked at the ROCE trend at Fujian Torch Electron Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. 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.

The Bottom Line On Fujian Torch Electron Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Fujian Torch Electron Technology's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 1.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Fujian Torch Electron Technology you'll probably want to know about.

While Fujian Torch Electron Technology 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.