Wecome Intelligent Manufacturing (SHSE:603070) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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?

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)

0.05 = CN¥106m ÷ (CN¥3.0b - CN¥928m) (Based on the trailing twelve months to September 2024).

Thus, Wecome Intelligent Manufacturing has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.

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 5.0% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Wecome Intelligent Manufacturing has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 gained an impressive 29% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Wecome Intelligent Manufacturing does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.