The Returns On Capital At Inspur Electronic Information Industry (SZSE:000977) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Inspur Electronic Information Industry (SZSE:000977), 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. To calculate this metric for Inspur Electronic Information Industry, this is the formula:

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

0.062 = CN¥1.6b ÷ (CN¥63b - CN¥37b) (Based on the trailing twelve months to June 2024).

Therefore, Inspur Electronic Information Industry has an ROCE of 6.2%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for Inspur Electronic Information Industry

Above you can see how the current ROCE for Inspur Electronic Information Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Inspur Electronic Information Industry .

The Trend Of ROCE

In terms of Inspur Electronic Information Industry's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.2% from 9.4% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Inspur Electronic Information Industry's current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Inspur Electronic Information Industry's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Inspur Electronic Information Industry. And the stock has followed suit returning a meaningful 93% to shareholders over 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.

Inspur Electronic Information Industry could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 000977 on our platform quite valuable.

While Inspur Electronic Information Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.