Chongqing Wangbian Electric (Group) (SHSE:603191) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Chongqing Wangbian Electric (Group) (SHSE:603191) 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. To calculate this metric for Chongqing Wangbian Electric (Group), this is the formula:

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

0.046 = CN¥171m ÷ (CN¥5.3b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Thus, Chongqing Wangbian Electric (Group) has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Chongqing Wangbian Electric (Group)

Above you can see how the current ROCE for Chongqing Wangbian Electric (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Wangbian Electric (Group) .

How Are Returns Trending?

When we looked at the ROCE trend at Chongqing Wangbian Electric (Group), we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. 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.

Our Take On Chongqing Wangbian Electric (Group)'s ROCE

To conclude, we've found that Chongqing Wangbian Electric (Group) is reinvesting in the business, but returns have been falling. Since the stock has declined 41% over the last year, investors may not be too optimistic on this trend improving either. 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.

One more thing: We've identified 3 warning signs with Chongqing Wangbian Electric (Group) (at least 1 which is concerning) , and understanding them would certainly be useful.

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.

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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.