Be Wary Of Wuhu Fuchun Dye and WeaveLtd (SHSE:605189) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Wuhu Fuchun Dye and WeaveLtd (SHSE:605189) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Wuhu Fuchun Dye and WeaveLtd:

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

0.046 = CN¥125m ÷ (CN¥4.4b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Therefore, Wuhu Fuchun Dye and WeaveLtd has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

View our latest analysis for Wuhu Fuchun Dye and WeaveLtd

In the above chart we have measured Wuhu Fuchun Dye and WeaveLtd'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 Wuhu Fuchun Dye and WeaveLtd for free.

The Trend Of ROCE

In terms of Wuhu Fuchun Dye and WeaveLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% 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.

The Bottom Line

While returns have fallen for Wuhu Fuchun Dye and WeaveLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 36% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Wuhu Fuchun Dye and WeaveLtd, we've spotted 4 warning signs, and 2 of them make us uncomfortable.

While Wuhu Fuchun Dye and WeaveLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com