If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Guangdong Fuxin Technology (SHSE:688662) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Guangdong Fuxin Technology, this is the formula:

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

0.018 = CN¥12m ÷ (CN¥892m - CN¥208m) (Based on the trailing twelve months to March 2024).

Therefore, Guangdong Fuxin Technology has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.5%.

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

What Does the ROCE Trend For Guangdong Fuxin Technology Tell Us?

When we looked at the ROCE trend at Guangdong Fuxin Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Guangdong Fuxin Technology has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line

We're a bit apprehensive about Guangdong Fuxin Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 2.3% in the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Guangdong Fuxin Technology does come with some risks, and we've found 3 warning signs 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.