Wuhu Token Sciences (SZSE:300088) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Wuhu Token Sciences (SZSE:300088), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Wuhu Token Sciences, this is the formula:

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

0.013 = CN¥127m ÷ (CN¥15b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Therefore, Wuhu Token Sciences has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

View our latest analysis for Wuhu Token Sciences

Above you can see how the current ROCE for Wuhu Token Sciences compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wuhu Token Sciences for free.

What Does the ROCE Trend For Wuhu Token Sciences Tell Us?

In terms of Wuhu Token Sciences' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.3% from 15% 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.

What We Can Learn From Wuhu Token Sciences' 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 Wuhu Token Sciences. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Wuhu Token Sciences (of which 1 shouldn't be ignored!) that you should know about.

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.