Wuhan DR Laser TechnologyLtd (SZSE:300776) Will Be Hoping To Turn Its Returns On Capital Around

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Wuhan DR Laser TechnologyLtd (SZSE:300776) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Wuhan DR Laser TechnologyLtd:

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

0.12 = CN¥483m ÷ (CN¥6.4b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Therefore, Wuhan DR Laser TechnologyLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Semiconductor industry.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuhan DR Laser TechnologyLtd .

How Are Returns Trending?

In terms of Wuhan DR Laser TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. 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.

What We Can Learn From Wuhan DR Laser TechnologyLtd's ROCE

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. And the stock has done incredibly well with a 111% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Wuhan DR Laser TechnologyLtd that we think you should be aware of.

While Wuhan DR Laser TechnologyLtd isn't earning the highest return, check out this free list of companies that are 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.