Shenzhen Friendcom Technology Development (SZSE:300514) Is Investing Its Capital With Increasing Efficiency

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Shenzhen Friendcom Technology Development's (SZSE:300514) returns on capital, so let's have a 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. Analysts use this formula to calculate it for Shenzhen Friendcom Technology Development:

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

0.22 = CN¥204m ÷ (CN¥1.3b - CN¥382m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Friendcom Technology Development has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Communications industry average of 4.4%.

Check out our latest analysis for Shenzhen Friendcom Technology Development

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

How Are Returns Trending?

We like the trends that we're seeing from Shenzhen Friendcom Technology Development. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The amount of capital employed has increased too, by 74%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shenzhen Friendcom Technology Development has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.4% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with Shenzhen Friendcom Technology Development and understanding this should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.