Be Wary Of Shanghai Friendess Electronic Technology (SHSE:688188) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shanghai Friendess Electronic Technology (SHSE:688188) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Shanghai Friendess Electronic Technology is:

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

0.15 = CN¥786m ÷ (CN¥5.5b - CN¥204m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Friendess Electronic Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Electronic industry.

View our latest analysis for Shanghai Friendess Electronic Technology

Above you can see how the current ROCE for Shanghai Friendess Electronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai Friendess Electronic Technology for free.

What Does the ROCE Trend For Shanghai Friendess Electronic Technology Tell Us?

In terms of Shanghai Friendess Electronic Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 47% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Shanghai Friendess Electronic Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 19% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing, we've spotted 1 warning sign facing Shanghai Friendess Electronic Technology that you might find interesting.

While Shanghai Friendess Electronic 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.