Here's What's Concerning About Wecome Intelligent Manufacturing's (SHSE:603070) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Wecome Intelligent Manufacturing (SHSE:603070) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Wecome Intelligent Manufacturing:

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

0.11 = CN¥238m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Wecome Intelligent Manufacturing has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.3% it's much better.

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'd like to look at how Wecome Intelligent Manufacturing has performed in the past in other metrics, you can view this free graph of Wecome Intelligent Manufacturing's past earnings, revenue and cash flow.

What Does the ROCE Trend For Wecome Intelligent Manufacturing Tell Us?

When we looked at the ROCE trend at Wecome Intelligent Manufacturing, we didn't gain much confidence. Around four years ago the returns on capital were 21%, but since then they've fallen to 11%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 32% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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. And in the last year, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

While Wecome Intelligent Manufacturing doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 603070 on our platform.

While Wecome Intelligent Manufacturing 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.