Wuhan DR Laser TechnologyLtd (SZSE:300776) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. 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)?

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 Wuhan DR Laser TechnologyLtd, this is the formula:

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

0.13 = CN¥510m ÷ (CN¥6.6b - CN¥2.6b) (Based on the trailing twelve months to June 2024).

So, Wuhan DR Laser TechnologyLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 4.3% it's much better.

Check out our latest analysis for Wuhan DR Laser TechnologyLtd

Above you can see how the current ROCE for Wuhan DR Laser TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wuhan DR Laser TechnologyLtd for free.

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

On the surface, the trend of ROCE at Wuhan DR Laser TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Wuhan DR Laser TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wuhan DR Laser TechnologyLtd. Furthermore the stock has climbed 81% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Wuhan DR Laser TechnologyLtd (including 1 which shouldn't be ignored) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.