GuangZhou Wahlap Technology (SZSE:301011) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at GuangZhou Wahlap Technology's (SZSE:301011) ROCE trend, we were pretty happy with what we saw.

What Is 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 GuangZhou Wahlap Technology, this is the formula:

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

0.16 = CN¥129m ÷ (CN¥1.3b - CN¥480m) (Based on the trailing twelve months to September 2024).

Thus, GuangZhou Wahlap Technology has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Leisure industry average of 5.3% it's much better.

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.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 90% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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

To sum it up, GuangZhou Wahlap Technology has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 18% over the last three years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to know some of the risks facing GuangZhou Wahlap Technology we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.