These Return Metrics Don't Make Wangsu Science & TechnologyLtd (SZSE:300017) Look Too Strong

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Wangsu Science & TechnologyLtd (SZSE:300017), the trends above didn't look too great.

Understanding 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)

0.033 = CN¥317m ÷ (CN¥11b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

So, Wangsu Science & TechnologyLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the IT industry average of 4.4%.

See our latest analysis for Wangsu Science & TechnologyLtd

Above you can see how the current ROCE for Wangsu Science & 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 Wangsu Science & TechnologyLtd for free.

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

We are a bit worried about the trend of returns on capital at Wangsu Science & TechnologyLtd. About five years ago, returns on capital were 7.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Wangsu Science & TechnologyLtd to turn into a multi-bagger.

The Bottom Line On Wangsu Science & TechnologyLtd's ROCE

In summary, it's unfortunate that Wangsu Science & TechnologyLtd is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

While Wangsu Science & TechnologyLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 300017 on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.