GuangZhou Wahlap Technology (SZSE:301011) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at GuangZhou Wahlap Technology's (SZSE:301011) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for GuangZhou Wahlap Technology:

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

0.14 = CN¥107m ÷ (CN¥1.2b - CN¥396m) (Based on the trailing twelve months to March 2024).

Therefore, GuangZhou Wahlap Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Leisure industry.

See our latest analysis for GuangZhou Wahlap Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangZhou Wahlap Technology's ROCE against it's prior returns. If you'd like to look at how GuangZhou Wahlap Technology has performed in the past in other metrics, you can view this free graph of GuangZhou Wahlap Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has employed 113% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that GuangZhou Wahlap Technology has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

In the end, GuangZhou Wahlap Technology has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 42%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for GuangZhou Wahlap Technology (of which 1 is a bit concerning!) 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.