Some Investors May Be Worried About Wangsu Science & TechnologyLtd's (SZSE:300017) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Wangsu Science & TechnologyLtd (SZSE:300017), we weren't too hopeful.

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. Analysts use this formula to calculate it for Wangsu Science & TechnologyLtd:

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

0.034 = CN¥345m ÷ (CN¥11b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

So, Wangsu Science & TechnologyLtd has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the IT industry average of 3.9%.

See our latest analysis for Wangsu Science & TechnologyLtd

In the above chart we have measured Wangsu Science & TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wangsu Science & TechnologyLtd for free.

What Does the ROCE Trend For Wangsu Science & TechnologyLtd Tell Us?

There is reason to be cautious about Wangsu Science & TechnologyLtd, given the returns are trending downwards. About five years ago, returns on capital were 6.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wangsu Science & TechnologyLtd becoming one if things continue as they have.

On a related note, Wangsu Science & TechnologyLtd has decreased its current liabilities to 10% 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.

The Bottom Line

In summary, it's unfortunate that Wangsu Science & TechnologyLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 26% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Wangsu Science & TechnologyLtd that you might find interesting.

While Wangsu Science & 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.

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