Some Investors May Be Worried About Windey Energy Technology Group's (SZSE:300772) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Windey Energy Technology Group (SZSE:300772), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Windey Energy Technology Group:

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

0.039 = CN¥382m ÷ (CN¥35b - CN¥25b) (Based on the trailing twelve months to September 2024).

So, Windey Energy Technology Group has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for Windey Energy Technology Group

In the above chart we have measured Windey Energy Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Windey Energy Technology Group for free.

How Are Returns Trending?

We weren't thrilled with the trend because Windey Energy Technology Group's ROCE has reduced by 47% over the last five years, while the business employed 351% more capital. That being said, Windey Energy Technology Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Windey Energy Technology Group might not have received a full period of earnings contribution from it.

On a side note, Windey Energy Technology Group's current liabilities are still rather high at 71% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

While returns have fallen for Windey Energy Technology Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 60% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Windey Energy Technology Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Windey Energy Technology Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.