Be Wary Of Wecome Intelligent Manufacturing (SHSE:603070) And Its Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wecome Intelligent Manufacturing (SHSE:603070), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Wecome Intelligent Manufacturing is:

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

0.063 = CN¥130m ÷ (CN¥2.9b - CN¥865m) (Based on the trailing twelve months to June 2024).

So, Wecome Intelligent Manufacturing has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

Check out our latest analysis for Wecome Intelligent Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wecome Intelligent Manufacturing's ROCE against it's prior returns. If you're interested in investigating Wecome Intelligent Manufacturing's past further, check out this free graph covering Wecome Intelligent Manufacturing's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Wecome Intelligent Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.3% from 22% five years ago. However it looks like Wecome Intelligent Manufacturing 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Wecome Intelligent Manufacturing has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Wecome Intelligent Manufacturing's ROCE

To conclude, we've found that Wecome Intelligent Manufacturing is reinvesting in the business, but returns have been falling. Since the stock has declined 32% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Wecome Intelligent Manufacturing has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Wecome Intelligent Manufacturing (1 makes us a bit uncomfortable) you should be aware of.

While Wecome Intelligent Manufacturing 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.