Why The 30% Return On Capital At Wuxi Autowell TechnologyLtd (SHSE:688516) Should Have Your Attention

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Wuxi Autowell TechnologyLtd (SHSE:688516) looks great, so lets see what the trend can tell us.

What Is 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. The formula for this calculation on Wuxi Autowell TechnologyLtd is:

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

0.30 = CN¥1.6b ÷ (CN¥16b - CN¥10b) (Based on the trailing twelve months to March 2024).

So, Wuxi Autowell TechnologyLtd has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.2%.

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're interested, you can view the analysts predictions in our free analyst report for Wuxi Autowell TechnologyLtd .

What The Trend Of ROCE Can Tell Us

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 30%. 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 1,273%. So we're very much inspired by what we're seeing at Wuxi Autowell TechnologyLtd thanks to its ability to profitably reinvest capital.

Another thing to note, Wuxi Autowell TechnologyLtd has a high ratio of current liabilities to total assets of 65%. 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

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Wuxi Autowell TechnologyLtd has. Astute investors may have an opportunity here because the stock has declined 38% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

Wuxi Autowell TechnologyLtd does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.