There Are Reasons To Feel Uneasy About Wuxi Paike New Materials TechnologyLtd's (SHSE:605123) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Wuxi Paike New Materials TechnologyLtd (SHSE:605123) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Wuxi Paike New Materials TechnologyLtd, this is the formula:

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).

Therefore, 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 6.8%.

View 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, you can check out the forecasts from the analysts covering Wuxi Paike New Materials TechnologyLtd for free.

What Does the ROCE Trend For Wuxi Paike New Materials TechnologyLtd Tell Us?

In terms of Wuxi Paike New Materials TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. However it looks like Wuxi Paike New Materials TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Wuxi Paike New Materials TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Wuxi Paike New Materials TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 61% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Wuxi Paike New Materials TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Wuxi Paike New Materials TechnologyLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.