Returns On Capital At Wanxiang QianchaoLtd (SZSE:000559) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wanxiang QianchaoLtd (SZSE:000559) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Wanxiang QianchaoLtd is:

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

0.067 = CN¥645m ÷ (CN¥20b - CN¥9.9b) (Based on the trailing twelve months to September 2023).

So, Wanxiang QianchaoLtd has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

Check out our latest analysis for Wanxiang QianchaoLtd

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

So How Is Wanxiang QianchaoLtd's ROCE Trending?

In terms of Wanxiang QianchaoLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Wanxiang QianchaoLtd 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.

Another thing to note, Wanxiang QianchaoLtd has a high ratio of current liabilities to total assets of 51%. 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 Wanxiang QianchaoLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Wanxiang QianchaoLtd's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Wanxiang QianchaoLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Wanxiang QianchaoLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.