Capital Allocation Trends At Wuxi Paike New Materials TechnologyLtd (SHSE:605123) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Wuxi Paike New Materials TechnologyLtd (SHSE:605123), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wuxi Paike New Materials TechnologyLtd:

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

0.12 = CN¥557m ÷ (CN¥6.8b - CN¥2.2b) (Based on the trailing twelve months to September 2023).

So, Wuxi Paike New Materials TechnologyLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Metals and Mining industry.

See our latest analysis for Wuxi Paike New Materials TechnologyLtd

In the above chart we have measured Wuxi Paike New Materials TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuxi Paike New Materials TechnologyLtd .

What Can We Tell From Wuxi Paike New Materials TechnologyLtd's ROCE Trend?

In terms of Wuxi Paike New Materials TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 22% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Wuxi Paike New Materials TechnologyLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 13% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Wuxi Paike New Materials TechnologyLtd, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.