Here's What's Concerning About Wondershare Technology Group's (SZSE:300624) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Wondershare Technology Group (SZSE:300624), it didn't seem to tick all of these boxes.

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. To calculate this metric for Wondershare Technology Group, this is the formula:

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

0.063 = CN¥88m ÷ (CN¥1.6b - CN¥209m) (Based on the trailing twelve months to September 2023).

Thus, Wondershare Technology Group has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 2.7% generated by the Software industry, it's much better.

Check out our latest analysis for Wondershare Technology Group

In the above chart we have measured Wondershare Technology Group'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 Wondershare Technology Group .

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 138%. That being said, Wondershare Technology Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wondershare Technology Group might not have received a full period of earnings contribution from it.

Our Take On Wondershare Technology Group's ROCE

While returns have fallen for Wondershare Technology Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 157% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Wondershare Technology Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Wondershare Technology Group 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.