Investors Could Be Concerned With Wuxi Paike New Materials TechnologyLtd's (SHSE:605123) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Wuxi Paike New Materials TechnologyLtd (SHSE:605123) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Wuxi Paike New Materials TechnologyLtd is:

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

0.062 = CN¥292m ÷ (CN¥7.0b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Paike New Materials TechnologyLtd has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.9%.

See our latest analysis for Wuxi Paike New Materials TechnologyLtd

Above you can see how the current ROCE for Wuxi Paike New Materials TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi Paike New Materials TechnologyLtd .

What The Trend Of ROCE Can Tell Us

In terms of Wuxi Paike New Materials TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 6.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Wuxi Paike New Materials TechnologyLtd's ROCE

In summary, Wuxi Paike New Materials TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last three years. Therefore based on the analysis done in this article, we don't think Wuxi Paike New Materials TechnologyLtd has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Wuxi Paike New Materials TechnologyLtd that we think you should be aware of.

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.