Weihai Guangtai Airport EquipmentLtd (SZSE:002111) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Weihai Guangtai Airport EquipmentLtd (SZSE:002111) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Weihai Guangtai Airport EquipmentLtd, this is the formula:

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

0.038 = CN¥159m ÷ (CN¥6.1b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

Therefore, Weihai Guangtai Airport EquipmentLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.9%.

See our latest analysis for Weihai Guangtai Airport EquipmentLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Weihai Guangtai Airport EquipmentLtd.

What Does the ROCE Trend For Weihai Guangtai Airport EquipmentLtd Tell Us?

When we looked at the ROCE trend at Weihai Guangtai Airport EquipmentLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. However it looks like Weihai Guangtai Airport EquipmentLtd 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'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.

In Conclusion...

To conclude, we've found that Weihai Guangtai Airport EquipmentLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 49% over the last five years, 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.

One more thing: We've identified 3 warning signs with Weihai Guangtai Airport EquipmentLtd (at least 1 which is a bit 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.