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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Fuwei Films (Holdings) (NASDAQ:FFHL) looks great, so lets see what the trend can tell us.
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 Fuwei Films (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥59m ÷ (CN¥447m - CN¥196m) (Based on the trailing twelve months to September 2020).
So, Fuwei Films (Holdings) has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 8.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fuwei Films (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Fuwei Films (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
It's great to see that Fuwei Films (Holdings) has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 24% on their capital employed. In regards to capital employed, Fuwei Films (Holdings) is using 30% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Fuwei Films (Holdings) could be selling under-performing assets since the ROCE is improving.
On a side note, Fuwei Films (Holdings)'s current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Fuwei Films (Holdings)'s ROCE
In a nutshell, we're pleased to see that Fuwei Films (Holdings) has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a separate note, we've found 3 warning signs for Fuwei Films (Holdings) you'll probably want to know about.
Fuwei Films (Holdings) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
This article by Simply Wall St is general in nature. 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.
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