Wuhan P&S Information Technology's (SZSE:300184) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Wuhan P&S Information Technology (SZSE:300184), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wuhan P&S Information Technology is:

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

0.032 = CN¥122m ÷ (CN¥5.7b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

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

See 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.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Wuhan P&S Information Technology, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

The Bottom Line

In summary, it's unfortunate that Wuhan P&S Information Technology is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Wuhan P&S Information Technology that we think you should be aware of.

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.