Fujian Forecam Optics (SHSE:688010) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Fujian Forecam Optics (SHSE:688010), we weren't too hopeful.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fujian Forecam Optics:

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

0.000084 = CN¥159k ÷ (CN¥2.6b - CN¥676m) (Based on the trailing twelve months to December 2024).

Therefore, Fujian Forecam Optics has an ROCE of 0.008%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.8%.

View our latest analysis for Fujian Forecam Optics

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

What Does the ROCE Trend For Fujian Forecam Optics Tell Us?

In terms of Fujian Forecam Optics' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Fujian Forecam Optics becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 26%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.008%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Fujian Forecam Optics' ROCE

In summary, it's unfortunate that Fujian Forecam Optics is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 5.0% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Fujian Forecam Optics, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.