Returns Are Gaining Momentum At Wencan Group (SHSE:603348)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Wencan Group (SHSE:603348) so let's look a bit deeper.

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. The formula for this calculation on Wencan Group is:

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

0.06 = CN¥313m ÷ (CN¥8.8b - CN¥3.6b) (Based on the trailing twelve months to September 2024).

Therefore, Wencan Group has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.1%.

View our latest analysis for Wencan Group

In the above chart we have measured Wencan Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wencan Group .

What Can We Tell From Wencan Group's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 68% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Wencan Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Wencan Group has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 2 warning signs facing Wencan Group that you might find interesting.

While Wencan Group 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.