Investors Met With Slowing Returns on Capital At Hangzhou Weiguang ElectronicLtd (SZSE:002801)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. That's why when we briefly looked at Hangzhou Weiguang ElectronicLtd's (SZSE:002801) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

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 Hangzhou Weiguang ElectronicLtd, this is the formula:

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

0.19 = CN¥311m ÷ (CN¥2.0b - CN¥352m) (Based on the trailing twelve months to September 2024).

So, Hangzhou Weiguang ElectronicLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.8% it's much better.

Check out our latest analysis for Hangzhou Weiguang ElectronicLtd

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'd like to look at how Hangzhou Weiguang ElectronicLtd has performed in the past in other metrics, you can view this free graph of Hangzhou Weiguang ElectronicLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 71% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Hangzhou Weiguang ElectronicLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Hangzhou Weiguang ElectronicLtd's ROCE

To sum it up, Hangzhou Weiguang ElectronicLtd has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Hangzhou Weiguang ElectronicLtd, we've discovered 3 warning signs that you should be aware of.

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.