Chongqing Fuling Electric Power Industrial (SHSE:600452) Will Be Hoping To Turn Its Returns On Capital Around

Simply Wall St · 10/15 01:16

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Chongqing Fuling Electric Power Industrial (SHSE:600452) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Chongqing Fuling Electric Power Industrial:

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

0.10 = CN¥509m ÷ (CN¥6.9b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

So, Chongqing Fuling Electric Power Industrial has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Electric Utilities industry.

See our latest analysis for Chongqing Fuling Electric Power Industrial

roce
SHSE:600452 Return on Capital Employed October 15th 2024

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'd like to look at how Chongqing Fuling Electric Power Industrial has performed in the past in other metrics, you can view this free graph of Chongqing Fuling Electric Power Industrial's past earnings, revenue and cash flow.

What Does the ROCE Trend For Chongqing Fuling Electric Power Industrial Tell Us?

In terms of Chongqing Fuling Electric Power Industrial's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 20% 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 27% 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.

The Bottom Line

To conclude, we've found that Chongqing Fuling Electric Power Industrial is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 95% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Chongqing Fuling Electric Power Industrial that we think you should be aware of.

While Chongqing Fuling Electric Power Industrial 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.