WG TECH (Jiang Xi)'s (SHSE:603773) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 WG TECH (Jiang Xi) (SHSE:603773) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on WG TECH (Jiang Xi) is:

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%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.8%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for WG TECH (Jiang Xi) .

The Trend Of ROCE

In terms of WG TECH (Jiang Xi)'s historical ROCE trend, it doesn't exactly demand attention. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 0.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

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.

What We Can Learn From WG TECH (Jiang Xi)'s ROCE

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 95% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for WG TECH (Jiang Xi) that we think you should be aware of.

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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.