Returns On Capital At Wintao Communications (SZSE:301139) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wintao Communications (SZSE:301139), we don't think it's current trends fit the mold of a multi-bagger.

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 Wintao Communications, this is the formula:

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

0.078 = CN¥154m ÷ (CN¥2.8b - CN¥875m) (Based on the trailing twelve months to December 2023).

So, Wintao Communications has an ROCE of 7.8%. On its own, that's a low figure but it's around the 7.1% average generated by the Construction industry.

See our latest analysis for Wintao Communications

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wintao Communications' ROCE against it's prior returns. If you're interested in investigating Wintao Communications' past further, check out this free graph covering Wintao Communications' past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Wintao Communications doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Wintao Communications has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Wintao Communications have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Wintao Communications does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Wintao Communications isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.