Returns On Capital Signal Tricky Times Ahead For Wuhan Raycus Fiber Laser TechnologiesLtd (SZSE:300747)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 investigating Wuhan Raycus Fiber Laser TechnologiesLtd (SZSE:300747), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Wuhan Raycus Fiber Laser TechnologiesLtd:

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

0.054 = CN¥192m ÷ (CN¥5.8b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

So, Wuhan Raycus Fiber Laser TechnologiesLtd has an ROCE of 5.4%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for Wuhan Raycus Fiber Laser TechnologiesLtd

In the above chart we have measured Wuhan Raycus Fiber Laser TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuhan Raycus Fiber Laser TechnologiesLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Wuhan Raycus Fiber Laser TechnologiesLtd doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 5.4%. 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.

On a side note, Wuhan Raycus Fiber Laser TechnologiesLtd's current liabilities have increased over the last five years to 39% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Wuhan Raycus Fiber Laser TechnologiesLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Wuhan Raycus Fiber Laser TechnologiesLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 42% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 1 warning sign facing Wuhan Raycus Fiber Laser TechnologiesLtd that you might find interesting.

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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com