WenYi Trinity Technology (SHSE:600520) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 WenYi Trinity Technology (SHSE:600520) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for WenYi Trinity Technology:

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

0.048 = CN¥18m ÷ (CN¥564m - CN¥184m) (Based on the trailing twelve months to September 2024).

So, WenYi Trinity Technology has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

Check out our latest analysis for WenYi Trinity Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for WenYi Trinity Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of WenYi Trinity Technology.

What Can We Tell From WenYi Trinity Technology's ROCE Trend?

Shareholders will be relieved that WenYi Trinity Technology has broken into profitability. The company now earns 4.8% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that WenYi Trinity Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From WenYi Trinity Technology's ROCE

In summary, we're delighted to see that WenYi Trinity Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 327% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.