Returns On Capital Are Showing Encouraging Signs At WenYi Trinity Technology (SHSE:600520)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in WenYi Trinity Technology's (SHSE:600520) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 WenYi Trinity Technology, this is the formula:

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

0.058 = CN¥21m ÷ (CN¥648m - CN¥293m) (Based on the trailing twelve months to September 2023).

Thus, WenYi Trinity Technology has an ROCE of 5.8%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

View our latest analysis for WenYi Trinity Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of WenYi Trinity Technology.

The Trend Of ROCE

It's great to see that WenYi Trinity Technology has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 5.8% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 29% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

Another thing to note, WenYi Trinity Technology has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

From what we've seen above, WenYi Trinity Technology has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 43% return over the last five years. In light of that, we think it's worth looking further into this stock because if WenYi Trinity Technology can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for WenYi Trinity Technology that we think 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.