Here's What To Make Of Wuxi Boton Technology's (SZSE:300031) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Wuxi Boton Technology (SZSE:300031), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Wuxi Boton Technology, this is the formula:

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

0.096 = CN¥413m ÷ (CN¥5.9b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Boton Technology has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.3% generated by the Entertainment industry, it's much better.

Check out our latest analysis for Wuxi Boton Technology

In the above chart we have measured Wuxi Boton Technology'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 Boton Technology for free.

What Does the ROCE Trend For Wuxi Boton Technology Tell Us?

The returns on capital haven't changed much for Wuxi Boton Technology in recent years. The company has employed 46% more capital in the last five years, and the returns on that capital have remained stable at 9.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Wuxi Boton Technology has done well to reduce current liabilities to 26% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Wuxi Boton Technology's ROCE

As we've seen above, Wuxi Boton Technology's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Wuxi Boton Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.