Wuxi Autowell TechnologyLtd (SHSE:688516) Could Become A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Wuxi Autowell TechnologyLtd's (SHSE:688516) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.34 = CN¥2.1b ÷ (CN¥15b - CN¥8.5b) (Based on the trailing twelve months to September 2024).

Therefore, Wuxi Autowell TechnologyLtd has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.8%.

View 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 data shows that returns on capital have increased substantially over the last five years to 34%. 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 1,298%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Wuxi Autowell TechnologyLtd has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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.

The Bottom Line

In summary, it's great to see that Wuxi Autowell TechnologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 44% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Wuxi Autowell TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.