The Returns On Capital At Fullink TechnologyLtd (SZSE:301067) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Fullink TechnologyLtd (SZSE:301067), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Fullink TechnologyLtd, this is the formula:

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

0.0034 = CN¥3.1m ÷ (CN¥1.3b - CN¥397m) (Based on the trailing twelve months to September 2024).

So, Fullink TechnologyLtd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.7%.

View our latest analysis for Fullink TechnologyLtd

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

How Are Returns Trending?

In terms of Fullink TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 41% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Fullink TechnologyLtd has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fullink TechnologyLtd. And the stock has followed suit returning a meaningful 38% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Fullink TechnologyLtd (of which 2 are significant!) that you should know about.

While Fullink TechnologyLtd 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.