There Are Reasons To Feel Uneasy About Wuhan Guide Infrared's (SZSE:002414) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Wuhan Guide Infrared (SZSE:002414) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wuhan Guide Infrared:

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

0.00031 = CN¥2.2m ÷ (CN¥8.8b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

So, Wuhan Guide Infrared has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

View our latest analysis for Wuhan Guide Infrared

In the above chart we have measured Wuhan Guide Infrared's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wuhan Guide Infrared for free.

What Can We Tell From Wuhan Guide Infrared's ROCE Trend?

When we looked at the ROCE trend at Wuhan Guide Infrared, we didn't gain much confidence. Around five years ago the returns on capital were 3.3%, but since then they've fallen to 0.03%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Wuhan Guide Infrared is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Wuhan Guide Infrared, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Wuhan Guide Infrared isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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