Here's What's Concerning About Wuhu Token Sciences' (SZSE:300088) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Wuhu Token Sciences (SZSE:300088), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Wuhu Token Sciences is:

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

0.014 = CN¥139m ÷ (CN¥16b - CN¥6.3b) (Based on the trailing twelve months to September 2024).

Thus, Wuhu Token Sciences has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.7%.

Check out our latest analysis for Wuhu Token Sciences

In the above chart we have measured Wuhu Token Sciences' 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 Wuhu Token Sciences for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Wuhu Token Sciences, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 1.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 39%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Wuhu Token Sciences' ROCE

While returns have fallen for Wuhu Token Sciences in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Wuhu Token Sciences does have some risks though, and we've spotted 3 warning signs for Wuhu Token Sciences that you might be interested in.

While Wuhu Token Sciences may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.