These Return Metrics Don't Make Wuhan P&S Information Technology (SZSE:300184) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Wuhan P&S Information Technology (SZSE:300184), the trends above didn't look too great.

Understanding 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 P&S Information Technology, this is the formula:

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

0.032 = CN¥122m ÷ (CN¥5.9b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

So, Wuhan P&S Information Technology has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Wuhan P&S Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuhan P&S Information Technology's ROCE against it's prior returns. If you'd like to look at how Wuhan P&S Information Technology has performed in the past in other metrics, you can view this free graph of Wuhan P&S Information Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Wuhan P&S Information Technology, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wuhan P&S Information Technology becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 21% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Wuhan P&S Information Technology we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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

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.