Some Investors May Be Worried About Zhejiang Wellsun Intelligent TechnologyLtd's (SZSE:300882) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. In light of that, when we looked at Zhejiang Wellsun Intelligent TechnologyLtd (SZSE:300882) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Wellsun Intelligent TechnologyLtd:

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

0.13 = CN¥148m ÷ (CN¥1.5b - CN¥370m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Wellsun Intelligent TechnologyLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

See our latest analysis for Zhejiang Wellsun Intelligent TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Wellsun Intelligent TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Wellsun Intelligent TechnologyLtd's past further, check out this free graph covering Zhejiang Wellsun Intelligent TechnologyLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Wellsun Intelligent TechnologyLtd's ROCE Trending?

In terms of Zhejiang Wellsun Intelligent TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zhejiang Wellsun Intelligent TechnologyLtd has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Zhejiang Wellsun Intelligent TechnologyLtd's ROCE

In summary, we're somewhat concerned by Zhejiang Wellsun Intelligent TechnologyLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 19% return to shareholders who held over the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Zhejiang Wellsun Intelligent TechnologyLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.