Wuxi Lead Intelligent EquipmentLTD's (SZSE:300450) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Wuxi Lead Intelligent EquipmentLTD (SZSE:300450), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Wuxi Lead Intelligent EquipmentLTD, this is the formula:

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

0.14 = CN¥1.8b ÷ (CN¥37b - CN¥24b) (Based on the trailing twelve months to March 2024).

Thus, Wuxi Lead Intelligent EquipmentLTD has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

See our latest analysis for Wuxi Lead Intelligent EquipmentLTD

In the above chart we have measured Wuxi Lead Intelligent EquipmentLTD's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi Lead Intelligent EquipmentLTD .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Wuxi Lead Intelligent EquipmentLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 65%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 14%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Wuxi Lead Intelligent EquipmentLTD's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wuxi Lead Intelligent EquipmentLTD. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Wuxi Lead Intelligent EquipmentLTD does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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.

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