Wuxi NCE PowerLtd (SHSE:605111) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 NCE PowerLtd (SHSE:605111), 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 NCE PowerLtd:

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

0.074 = CN¥276m ÷ (CN¥4.2b - CN¥489m) (Based on the trailing twelve months to September 2023).

Thus, Wuxi NCE PowerLtd has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 5.3% generated by the Semiconductor industry, it's much better.

See 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'd like, you can check out the forecasts from the analysts covering Wuxi NCE PowerLtd for free.

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

When we looked at the ROCE trend at Wuxi NCE PowerLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 28% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 related note, Wuxi NCE PowerLtd has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 53% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Wuxi NCE PowerLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

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.