Investors Could Be Concerned With Wuhu Token Sciences' (SZSE:300088) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Wuhu Token Sciences (SZSE:300088) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Wuhu Token Sciences:

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).

Therefore, Wuhu Token Sciences has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

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.

The Trend Of ROCE

When we looked at the ROCE trend at Wuhu Token Sciences, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.4% from 16% 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 39%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

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. In light of this, the stock has only gained 2.8% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Wuhu Token Sciences does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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.