UCAP Cloud Information TechnologyLtd (SHSE:688228) May Have Issues Allocating Its Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating UCAP Cloud Information TechnologyLtd (SHSE:688228), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 UCAP Cloud Information TechnologyLtd:

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

0.037 = CN¥56m ÷ (CN¥1.9b - CN¥369m) (Based on the trailing twelve months to September 2024).

Thus, UCAP Cloud Information TechnologyLtd has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns 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'd like to look at how UCAP Cloud Information TechnologyLtd has performed in the past in other metrics, you can view this free graph of UCAP Cloud Information TechnologyLtd's past earnings, revenue and cash flow.

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. Over the last five years, returns on capital have decreased to 3.7% from 32% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. 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.

Our Take On UCAP Cloud Information TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that UCAP Cloud Information TechnologyLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 70% over the last three 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.

If you want to know some of the risks facing UCAP Cloud Information TechnologyLtd we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While UCAP Cloud Information 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.