Investors Met With Slowing Returns on Capital At WG TECH (Jiang Xi) (SHSE:603773)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at WG TECH (Jiang Xi) (SHSE:603773) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for WG TECH (Jiang Xi):

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

0.0052 = CN¥13m ÷ (CN¥4.4b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

So, WG TECH (Jiang Xi) has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for WG TECH (Jiang Xi)

In the above chart we have measured WG TECH (Jiang Xi)'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 WG TECH (Jiang Xi) .

So How Is WG TECH (Jiang Xi)'s ROCE Trending?

In terms of WG TECH (Jiang Xi)'s historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 0.5% and the business has deployed 56% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 43% of total assets, this reported ROCE would probably be less than0.5% because total capital employed would be higher.The 0.5% ROCE could be even lower if current liabilities weren't 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Key Takeaway

As we've seen above, WG TECH (Jiang Xi)'s returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for WG TECH (Jiang Xi) (of which 1 makes us a bit uncomfortable!) that you should know about.

While WG TECH (Jiang Xi) 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.