Wuchan Zhongda GroupLtd (SHSE:600704) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Wuchan Zhongda GroupLtd (SHSE:600704) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Wuchan Zhongda GroupLtd is:

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

0.063 = CN¥4.2b ÷ (CN¥202b - CN¥136b) (Based on the trailing twelve months to September 2024).

Therefore, Wuchan Zhongda GroupLtd has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

Check out our latest analysis for Wuchan Zhongda GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuchan Zhongda GroupLtd's ROCE against it's prior returns. If you're interested in investigating Wuchan Zhongda GroupLtd's past further, check out this free graph covering Wuchan Zhongda GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Wuchan Zhongda GroupLtd's ROCE Trend?

When we looked at the ROCE trend at Wuchan Zhongda GroupLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.7% over the last five years. However it looks like Wuchan Zhongda GroupLtd 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'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 side note, Wuchan Zhongda GroupLtd's current liabilities are still rather high at 67% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Wuchan Zhongda GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Wuchan Zhongda GroupLtd you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.