Wuhan Fingu Electronic Technology (SZSE:002194) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Wuhan Fingu Electronic Technology (SZSE:002194), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wuhan Fingu Electronic Technology, this is the formula:

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

0.0045 = CN¥12m ÷ (CN¥3.0b - CN¥388m) (Based on the trailing twelve months to September 2024).

Thus, Wuhan Fingu Electronic Technology has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Wuhan Fingu Electronic Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Wuhan Fingu Electronic Technology's past further, check out this free graph covering Wuhan Fingu Electronic Technology's past earnings, revenue and cash flow.

What Can We Tell From Wuhan Fingu Electronic Technology's ROCE Trend?

When we looked at the ROCE trend at Wuhan Fingu Electronic Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Wuhan Fingu Electronic Technology's ROCE

In summary, we're somewhat concerned by Wuhan Fingu Electronic Technology's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Wuhan Fingu Electronic Technology (at least 2 which are potentially serious) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.