Here's What's Concerning About Wuhan Kotei InformaticsLtd's (SZSE:301221) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Wuhan Kotei InformaticsLtd (SZSE:301221) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Wuhan Kotei InformaticsLtd, this is the formula:

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

0.0015 = CN¥3.1m ÷ (CN¥2.2b - CN¥171m) (Based on the trailing twelve months to September 2024).

Therefore, Wuhan Kotei InformaticsLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.8%.

See our latest analysis for Wuhan Kotei InformaticsLtd

Above you can see how the current ROCE for Wuhan Kotei InformaticsLtd 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 Wuhan Kotei InformaticsLtd for free.

What Can We Tell From Wuhan Kotei InformaticsLtd's ROCE Trend?

When we looked at the ROCE trend at Wuhan Kotei InformaticsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Wuhan Kotei InformaticsLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Wuhan Kotei InformaticsLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 301221 on our platform quite valuable.

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.

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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.