Here's What's Concerning About Chengdu Information Technology of Chinese Academy of SciencesLtd's (SZSE:300678) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678), it didn't seem to tick all of these boxes.

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. To calculate this metric for Chengdu Information Technology of Chinese Academy of SciencesLtd, this is the formula:

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

0.0039 = CN¥3.4m ÷ (CN¥1.0b - CN¥172m) (Based on the trailing twelve months to September 2024).

Thus, Chengdu Information Technology of Chinese Academy of SciencesLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.

See 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're interested in investigating Chengdu Information Technology of Chinese Academy of SciencesLtd's past further, check out this free graph covering Chengdu Information Technology of Chinese Academy of SciencesLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Chengdu Information Technology of Chinese Academy of SciencesLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 0.4%. 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.

The Bottom Line On Chengdu Information Technology of Chinese Academy of SciencesLtd's ROCE

In summary, Chengdu Information Technology of Chinese Academy of SciencesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 168% return in the last five years, so the market appears to be rosy about its future. 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 4 warning signs with Chengdu Information Technology of Chinese Academy of SciencesLtd (at least 2 which shouldn't be ignored) , and understanding them 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.