Wuhu Fuchun Dye and WeaveLtd (SHSE:605189) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Wuhu Fuchun Dye and WeaveLtd (SHSE:605189), 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. To calculate this metric for Wuhu Fuchun Dye and WeaveLtd, this is the formula:

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

0.07 = CN¥191m ÷ (CN¥4.9b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Therefore, Wuhu Fuchun Dye and WeaveLtd has an ROCE of 7.0%. On its own, that's a low figure but it's around the 6.5% average generated by the Luxury industry.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Wuhu Fuchun Dye and WeaveLtd .

What Does the ROCE Trend For Wuhu Fuchun Dye and WeaveLtd Tell Us?

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 14% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Wuhu Fuchun Dye and WeaveLtd's current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Wuhu Fuchun Dye and WeaveLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Wuhu Fuchun Dye and WeaveLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 39% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Wuhu Fuchun Dye and WeaveLtd (of which 1 doesn't sit too well with us!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.