Wuxi NCE PowerLtd's (SHSE:605111) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Wuxi NCE PowerLtd (SHSE:605111) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wuxi NCE PowerLtd, this is the formula:

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).

So, Wuxi NCE PowerLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Semiconductor industry.

See our latest analysis for Wuxi NCE PowerLtd

In the above chart we have measured Wuxi NCE PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wuxi NCE PowerLtd for free.

How Are Returns Trending?

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 11% from 19% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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, Wuxi NCE PowerLtd has done well to pay down its current liabilities to 8.5% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Wuxi NCE PowerLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 45% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.