Returns On Capital At Wuxi Boton Technology (SZSE:300031) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Wuxi Boton Technology (SZSE:300031), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Wuxi Boton Technology:

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).

Therefore, 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.

View 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're interested, you can view the analysts predictions in our free analyst report for Wuxi Boton Technology .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Wuxi Boton Technology. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 26% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Wuxi Boton Technology's ROCE

In summary, Wuxi Boton Technology has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Wuxi Boton Technology does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Wuxi Boton Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.