Be Wary Of Zhejiang Whyis TechnologyLtd (SZSE:301218) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhejiang Whyis TechnologyLtd (SZSE:301218), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zhejiang Whyis TechnologyLtd:

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

0.007 = CN¥6.5m ÷ (CN¥1.3b - CN¥412m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Whyis TechnologyLtd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the IT industry average of 4.4%.

See our latest analysis for Zhejiang Whyis TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Whyis TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Whyis TechnologyLtd.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Whyis TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhejiang Whyis TechnologyLtd has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Zhejiang Whyis TechnologyLtd's ROCE

In summary, we're somewhat concerned by Zhejiang Whyis TechnologyLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 21% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Zhejiang Whyis TechnologyLtd, we've discovered 2 warning signs that you should be aware of.

While Zhejiang Whyis 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.