Be Wary Of Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Chengdu Information Technology of Chinese Academy of SciencesLtd is:

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

0.0086 = CN¥7.4m ÷ (CN¥1.1b - CN¥249m) (Based on the trailing twelve months to June 2024).

Therefore, Chengdu Information Technology of Chinese Academy of SciencesLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the IT industry average of 3.8%.

View our latest analysis for Chengdu Information Technology of Chinese Academy of SciencesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Information Technology of Chinese Academy of SciencesLtd's ROCE against it's prior returns. If you'd like to look at how Chengdu Information Technology of Chinese Academy of SciencesLtd has performed in the past in other metrics, you can view this free graph of Chengdu Information Technology of Chinese Academy of SciencesLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Chengdu Information Technology of Chinese Academy of SciencesLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 6.9% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Chengdu Information Technology of Chinese Academy of SciencesLtd's ROCE

To conclude, we've found that Chengdu Information Technology of Chinese Academy of SciencesLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 58% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with Chengdu Information Technology of Chinese Academy of SciencesLtd (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.