Returns on Capital Paint A Bright Future For Wuxi Autowell TechnologyLtd (SHSE:688516)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Wuxi Autowell TechnologyLtd (SHSE:688516) we really liked what we saw.

Understanding 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 Autowell TechnologyLtd is:

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

0.32 = CN¥1.5b ÷ (CN¥14b - CN¥9.8b) (Based on the trailing twelve months to December 2023).

So, Wuxi Autowell TechnologyLtd has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

See our latest analysis for Wuxi Autowell TechnologyLtd

In the above chart we have measured Wuxi Autowell TechnologyLtd'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 Autowell TechnologyLtd for free.

What Can We Tell From Wuxi Autowell TechnologyLtd's ROCE Trend?

We like the trends that we're seeing from Wuxi Autowell TechnologyLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 32%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 1,135%. So we're very much inspired by what we're seeing at Wuxi Autowell TechnologyLtd thanks to its ability to profitably reinvest capital.

On a side note, Wuxi Autowell TechnologyLtd's current liabilities are still rather high at 68% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Wuxi Autowell TechnologyLtd's ROCE

To sum it up, Wuxi Autowell TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 264% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Wuxi Autowell TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

Wuxi Autowell TechnologyLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.