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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Founder Technology GroupLtd (SHSE:600601) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Founder Technology GroupLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CN¥157m ÷ (CN¥5.7b - CN¥1.5b) (Based on the trailing twelve months to December 2023).
So, Founder Technology GroupLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 6.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Founder Technology GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Founder Technology GroupLtd.
How Are Returns Trending?
Shareholders will be relieved that Founder Technology GroupLtd has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.8%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Founder Technology GroupLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Founder Technology GroupLtd's ROCE
In summary, we're delighted to see that Founder Technology GroupLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 36% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600601 on our platform that is definitely worth checking out.
While Founder Technology GroupLtd 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.