Here's What's Concerning About Wuxi NCE PowerLtd's (SHSE:605111) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Wuxi NCE PowerLtd (SHSE:605111), it didn't seem to tick all of these boxes.

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 NCE PowerLtd is:

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

0.11 = CN¥440m ÷ (CN¥4.4b - CN¥371m) (Based on the trailing twelve months to September 2024).

Therefore, Wuxi NCE PowerLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Semiconductor industry.

View our latest analysis for Wuxi NCE PowerLtd

Above you can see how the current ROCE for Wuxi NCE PowerLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi NCE PowerLtd .

What Does the ROCE Trend For Wuxi NCE PowerLtd Tell Us?

In terms of Wuxi NCE PowerLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. However it looks like Wuxi NCE PowerLtd 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 related note, Wuxi NCE PowerLtd has decreased its current liabilities to 8.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Wuxi NCE PowerLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 54% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Wuxi NCE PowerLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 605111 on our platform quite valuable.

While Wuxi NCE PowerLtd 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.