The Returns On Capital At UCAP Cloud Information TechnologyLtd (SHSE:688228) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at UCAP Cloud Information TechnologyLtd (SHSE:688228) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on UCAP Cloud Information TechnologyLtd is:

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

0.0095 = CN¥14m ÷ (CN¥1.9b - CN¥369m) (Based on the trailing twelve months to December 2024).

Therefore, UCAP Cloud Information TechnologyLtd has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.

See our latest analysis for UCAP Cloud Information TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for UCAP Cloud Information TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of UCAP Cloud Information TechnologyLtd.

What Can We Tell From UCAP Cloud Information TechnologyLtd's ROCE Trend?

In terms of UCAP Cloud Information TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 38%, but since then they've fallen to 1.0%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, UCAP Cloud Information TechnologyLtd has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From UCAP Cloud Information TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for UCAP Cloud Information TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing UCAP Cloud Information TechnologyLtd we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While UCAP Cloud Information 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.