There Are Reasons To Feel Uneasy About Wave Cyber (Shanghai)Co's (SHSE:688718) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Wave Cyber (Shanghai)Co (SHSE:688718), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Wave Cyber (Shanghai)Co:

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

0.04 = CN¥31m ÷ (CN¥874m - CN¥88m) (Based on the trailing twelve months to June 2024).

Therefore, Wave Cyber (Shanghai)Co has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

See our latest analysis for Wave Cyber (Shanghai)Co

In the above chart we have measured Wave Cyber (Shanghai)Co's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wave Cyber (Shanghai)Co .

So How Is Wave Cyber (Shanghai)Co's ROCE Trending?

When we looked at the ROCE trend at Wave Cyber (Shanghai)Co, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 16% five years ago. 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.

In Conclusion...

In summary, Wave Cyber (Shanghai)Co is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 61% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Wave Cyber (Shanghai)Co does come with some risks, and we've found 1 warning sign that you should be aware of.

While Wave Cyber (Shanghai)Co 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.