Be Wary Of Fibocom Wireless (SZSE:300638) 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Fibocom Wireless (SZSE:300638) 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)?

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. To calculate this metric for Fibocom Wireless, this is the formula:

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

0.16 = CN¥666m ÷ (CN¥7.3b - CN¥3.2b) (Based on the trailing twelve months to March 2024).

So, Fibocom Wireless has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Communications industry.

See our latest analysis for Fibocom Wireless

Above you can see how the current ROCE for Fibocom Wireless compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fibocom Wireless .

So How Is Fibocom Wireless' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 28% five years ago, while capital employed has grown 725%. That being said, Fibocom Wireless raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Fibocom Wireless' earnings and if they change as a result from the capital raise.

Another thing to note, Fibocom Wireless has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Fibocom Wireless' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fibocom Wireless is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 116% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Fibocom Wireless and understanding it should be part of your investment process.

While Fibocom Wireless may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.