Here's What's Concerning About Fujian Star-net Communication's (SZSE:002396) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Fujian Star-net Communication (SZSE:002396), we don't think it's current trends fit the mold of a multi-bagger.

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 Fujian Star-net Communication:

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

0.014 = CN¥133m ÷ (CN¥15b - CN¥5.3b) (Based on the trailing twelve months to September 2023).

So, Fujian Star-net Communication has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 5.1%.

Check out our latest analysis for Fujian Star-net Communication

In the above chart we have measured Fujian Star-net Communication's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fujian Star-net Communication .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fujian Star-net Communication doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 1.4%. However it looks like Fujian Star-net Communication might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Fujian Star-net Communication's ROCE

Bringing it all together, while we're somewhat encouraged by Fujian Star-net Communication's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 32% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Fujian Star-net Communication does come with some risks, and we've found 2 warning signs that you should be aware of.

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.