Wuxi Chemical Equipment (SZSE:001332) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wuxi Chemical Equipment (SZSE:001332), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Wuxi Chemical Equipment:

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

0.043 = CN¥99m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

Thus, Wuxi Chemical Equipment has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for Wuxi Chemical Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi Chemical Equipment's ROCE against it's prior returns. If you'd like to look at how Wuxi Chemical Equipment has performed in the past in other metrics, you can view this free graph of Wuxi Chemical Equipment's past earnings, revenue and cash flow.

So How Is Wuxi Chemical Equipment's ROCE Trending?

On the surface, the trend of ROCE at Wuxi Chemical Equipment doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Wuxi Chemical Equipment 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.

The Bottom Line On Wuxi Chemical Equipment's ROCE

In summary, Wuxi Chemical Equipment 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 year, the stock has given away 36% 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.

If you want to know some of the risks facing Wuxi Chemical Equipment we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.