Wuxi New Hongtai Electrical TechnologyLtd's (SHSE:603016) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Wuxi New Hongtai Electrical TechnologyLtd (SHSE:603016), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wuxi New Hongtai Electrical TechnologyLtd, this is the formula:

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

0.08 = CN¥68m ÷ (CN¥1.0b - CN¥177m) (Based on the trailing twelve months to September 2023).

Therefore, Wuxi New Hongtai Electrical TechnologyLtd has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.8%.

Check out our latest analysis for Wuxi New Hongtai Electrical TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi New Hongtai Electrical TechnologyLtd'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 Wuxi New Hongtai Electrical TechnologyLtd.

What Does the ROCE Trend For Wuxi New Hongtai Electrical TechnologyLtd Tell Us?

Things have been pretty stable at Wuxi New Hongtai Electrical TechnologyLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Wuxi New Hongtai Electrical TechnologyLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Wuxi New Hongtai Electrical TechnologyLtd's ROCE

In a nutshell, Wuxi New Hongtai Electrical TechnologyLtd has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 132% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 2 warning signs for Wuxi New Hongtai Electrical TechnologyLtd 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.