EmbedWay Technologies (Shanghai) (SHSE:603496) Could Be Struggling To Allocate 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. In light of that, when we looked at EmbedWay Technologies (Shanghai) (SHSE:603496) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on EmbedWay Technologies (Shanghai) is:

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

0.075 = CN¥106m ÷ (CN¥2.4b - CN¥946m) (Based on the trailing twelve months to March 2024).

Thus, EmbedWay Technologies (Shanghai) has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 3.9%.

See our latest analysis for EmbedWay Technologies (Shanghai)

In the above chart we have measured EmbedWay Technologies (Shanghai)'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 EmbedWay Technologies (Shanghai) .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at EmbedWay Technologies (Shanghai) doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, EmbedWay Technologies (Shanghai)'s current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that EmbedWay Technologies (Shanghai) is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 104% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in EmbedWay Technologies (Shanghai) it's worth checking out our FREE intrinsic value approximation for 603496 to see if it's trading at an attractive price in other respects.

While EmbedWay Technologies (Shanghai) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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