The Returns On Capital At Wuhan Kotei InformaticsLtd (SZSE:301221) Don't Inspire Confidence

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. 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 investigating Wuhan Kotei InformaticsLtd (SZSE:301221), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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)

0.015 = CN¥31m ÷ (CN¥2.3b - CN¥227m) (Based on the trailing twelve months to September 2023).

Thus, Wuhan Kotei InformaticsLtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Software industry average of 2.7%.

Check out our latest analysis for Wuhan Kotei InformaticsLtd

In the above chart we have measured Wuhan Kotei InformaticsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Wuhan Kotei InformaticsLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Wuhan Kotei InformaticsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 4.5% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Wuhan Kotei InformaticsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wuhan Kotei InformaticsLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 10% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Wuhan Kotei InformaticsLtd does have some risks though, and we've spotted 1 warning sign for Wuhan Kotei InformaticsLtd that you might be interested in.

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.