Returns On Capital At Shanghai Wisdom Information Technology (SZSE:301315) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shanghai Wisdom Information Technology (SZSE:301315) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Wisdom Information Technology, this is the formula:

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

0.032 = CN¥32m ÷ (CN¥1.1b - CN¥100m) (Based on the trailing twelve months to March 2024).

So, Shanghai Wisdom Information Technology has an ROCE of 3.2%. In absolute terms, that's a low return but it's around the IT industry average of 3.9%.

See our latest analysis for Shanghai Wisdom Information Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Wisdom Information Technology.

What The Trend Of ROCE Can Tell Us

In terms of Shanghai Wisdom Information Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.2% from 13% five years ago. However it looks like Shanghai Wisdom Information Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a related note, Shanghai Wisdom Information Technology has decreased its current liabilities to 8.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Key Takeaway

Bringing it all together, while we're somewhat encouraged by Shanghai Wisdom Information Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shanghai Wisdom Information Technology has the makings of a multi-bagger.

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

While Shanghai Wisdom Information Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com