Shenzhen WOTE Advanced MaterialsLtd (SZSE:002886) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen WOTE Advanced MaterialsLtd (SZSE:002886), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Shenzhen WOTE Advanced MaterialsLtd is:

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

0.0083 = CN¥22m ÷ (CN¥3.2b - CN¥657m) (Based on the trailing twelve months to September 2023).

So, Shenzhen WOTE Advanced MaterialsLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.8%.

Check out our latest analysis for Shenzhen WOTE Advanced MaterialsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen WOTE Advanced MaterialsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen WOTE Advanced MaterialsLtd.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shenzhen WOTE Advanced MaterialsLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. However it looks like Shenzhen WOTE Advanced MaterialsLtd 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.

On a side note, Shenzhen WOTE Advanced MaterialsLtd has done well to pay down its current liabilities to 20% 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.

What We Can Learn From Shenzhen WOTE Advanced MaterialsLtd's ROCE

To conclude, we've found that Shenzhen WOTE Advanced MaterialsLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.4% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 4 warning signs for Shenzhen WOTE Advanced MaterialsLtd (1 is concerning) you should be aware of.

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.

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.