Be Wary Of Hangzhou Wensli Silk Culture (SZSE:301066) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hangzhou Wensli Silk Culture (SZSE:301066) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Hangzhou Wensli Silk Culture is:

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

0.072 = CN¥48m ÷ (CN¥935m - CN¥266m) (Based on the trailing twelve months to December 2023).

So, Hangzhou Wensli Silk Culture has an ROCE of 7.2%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

Check out our latest analysis for Hangzhou Wensli Silk Culture

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Wensli Silk Culture.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Hangzhou Wensli Silk Culture's ROCE has reduced by 49% over the last five years, while the business employed 69% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hangzhou Wensli Silk Culture's earnings and if they change as a result from the capital raise.

The Bottom Line On Hangzhou Wensli Silk Culture's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hangzhou Wensli Silk Culture. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Hangzhou Wensli Silk Culture (including 1 which makes us a bit uncomfortable) .

While Hangzhou Wensli Silk Culture 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.