Returns On Capital Signal Tricky Times Ahead For Chengdu Wintrue Holding (SZSE:002539)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Chengdu Wintrue Holding (SZSE:002539), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Chengdu Wintrue Holding, this is the formula:

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

0.064 = CN¥779m ÷ (CN¥21b - CN¥8.7b) (Based on the trailing twelve months to March 2024).

Therefore, Chengdu Wintrue Holding has an ROCE of 6.4%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

View our latest analysis for Chengdu Wintrue Holding

Above you can see how the current ROCE for Chengdu Wintrue Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengdu Wintrue Holding .

What Can We Tell From Chengdu Wintrue Holding's ROCE Trend?

On the surface, the trend of ROCE at Chengdu Wintrue Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. 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.

On a related note, Chengdu Wintrue Holding has decreased its current liabilities to 42% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Chengdu Wintrue Holding's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Chengdu Wintrue Holding we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Chengdu Wintrue Holding 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.