Investors Could Be Concerned With Hubei W-olf Photoelectric Technology's (SZSE:002962) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 briefly looking over the numbers, we don't think Hubei W-olf Photoelectric Technology (SZSE:002962) 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?

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 Hubei W-olf Photoelectric Technology:

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

0.015 = CN¥29m ÷ (CN¥2.1b - CN¥230m) (Based on the trailing twelve months to March 2024).

So, Hubei W-olf Photoelectric Technology has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.7%.

View our latest analysis for Hubei W-olf Photoelectric Technology

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 Hubei W-olf Photoelectric Technology has performed in the past in other metrics, you can view this free graph of Hubei W-olf Photoelectric Technology's past earnings, revenue and cash flow.

What Can We Tell From Hubei W-olf Photoelectric Technology's ROCE Trend?

On the surface, the trend of ROCE at Hubei W-olf Photoelectric Technology doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 1.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Hubei W-olf Photoelectric Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Hubei W-olf Photoelectric Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 51% in the last five years. 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 Hubei W-olf Photoelectric Technology we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.