Returns On Capital Signal Tricky Times Ahead For Chongqing Fuling Electric Power Industrial (SHSE:600452)

There are a few key trends to look for if we want to identify the next multi-bagger. 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 briefly looking over the numbers, we don't think Chongqing Fuling Electric Power Industrial (SHSE:600452) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Chongqing Fuling Electric Power Industrial is:

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

0.11 = CN¥565m ÷ (CN¥6.8b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Thus, Chongqing Fuling Electric Power Industrial has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electric Utilities industry.

Check out our latest analysis for Chongqing Fuling Electric Power Industrial

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chongqing Fuling Electric Power Industrial's past further, check out this free graph covering Chongqing Fuling Electric Power Industrial's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Chongqing Fuling Electric Power Industrial, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. However it looks like Chongqing Fuling Electric Power Industrial 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Chongqing Fuling Electric Power Industrial has done well to pay down its current liabilities to 25% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Chongqing Fuling Electric Power Industrial's ROCE

To conclude, we've found that Chongqing Fuling Electric Power Industrial is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 162% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Chongqing Fuling Electric Power Industrial does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.