Guangdong Weide Information Technology CO.Ltd (SHSE:688171) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guangdong Weide Information Technology CO.Ltd (SHSE:688171), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangdong Weide Information Technology CO.Ltd:

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

0.00076 = CN¥636k ÷ (CN¥863m - CN¥28m) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Weide Information Technology CO.Ltd has an ROCE of 0.08%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Guangdong Weide Information Technology CO.Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Weide Information Technology CO.Ltd's ROCE against it's prior returns. If you're interested in investigating Guangdong Weide Information Technology CO.Ltd's past further, check out this free graph covering Guangdong Weide Information Technology CO.Ltd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Guangdong Weide Information Technology CO.Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 43% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Guangdong Weide Information Technology CO.Ltd has done well to pay down its current liabilities to 3.3% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Guangdong Weide Information Technology CO.Ltd's ROCE

We're a bit apprehensive about Guangdong Weide Information Technology CO.Ltd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 27% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Guangdong Weide Information Technology CO.Ltd (including 1 which doesn't sit too well with us) .

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.