Wuxi Commercial Mansion Grand Orient's (SHSE:600327) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Wuxi Commercial Mansion Grand Orient (SHSE:600327) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wuxi Commercial Mansion Grand Orient is:

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

0.023 = CN¥91m ÷ (CN¥5.6b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Commercial Mansion Grand Orient has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 5.0%.

View our latest analysis for Wuxi Commercial Mansion Grand Orient

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Wuxi Commercial Mansion Grand Orient.

The Trend Of ROCE

When we looked at the ROCE trend at Wuxi Commercial Mansion Grand Orient, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.4% over the last five years. However it looks like Wuxi Commercial Mansion Grand Orient 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 Commercial Mansion Grand Orient's ROCE

Bringing it all together, while we're somewhat encouraged by Wuxi Commercial Mansion Grand Orient's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 169% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Wuxi Commercial Mansion Grand Orient (including 1 which makes us a bit uncomfortable) .

While Wuxi Commercial Mansion Grand Orient 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.

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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.