Shandong Fengxiang (HKG:9977) Could Be Struggling To Allocate 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'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. Although, when we looked at Shandong Fengxiang (HKG:9977), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shandong Fengxiang is:

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

0.062 = CN¥223m ÷ (CN¥5.1b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Fengxiang has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Food industry average of 7.7%.

Check out our latest analysis for Shandong Fengxiang

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 Shandong Fengxiang's past further, check out this free graph covering Shandong Fengxiang's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Shandong Fengxiang's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 39% over the last five years. However it looks like Shandong Fengxiang 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 related note, Shandong Fengxiang has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Shandong Fengxiang's ROCE

To conclude, we've found that Shandong Fengxiang is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Shandong Fengxiang, we've spotted 3 warning signs, and 1 of them is potentially serious.

While Shandong Fengxiang isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.