The Returns On Capital At Wuhan DR Laser TechnologyLtd (SZSE:300776) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Wuhan DR Laser TechnologyLtd (SZSE:300776) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Wuhan DR Laser TechnologyLtd is:

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

0.12 = CN¥484m ÷ (CN¥6.8b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Therefore, Wuhan DR Laser TechnologyLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 3.9% it's much better.

Check out our latest analysis for Wuhan DR Laser TechnologyLtd

In the above chart we have measured Wuhan DR Laser 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 Wuhan DR Laser TechnologyLtd .

What Can We Tell From Wuhan DR Laser TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Wuhan DR Laser TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 57% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Wuhan DR Laser TechnologyLtd has decreased its current liabilities to 41% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Wuhan DR Laser TechnologyLtd is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 39% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know about the risks facing Wuhan DR Laser TechnologyLtd, we've discovered 2 warning signs that you should be aware of.

While Wuhan DR Laser TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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