Investors Could Be Concerned With Jiangxi Welgao Electronics' (SZSE:301251) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jiangxi Welgao Electronics (SZSE:301251) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Jiangxi Welgao Electronics:

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

0.03 = CN¥44m ÷ (CN¥2.1b - CN¥662m) (Based on the trailing twelve months to June 2024).

Thus, Jiangxi Welgao Electronics has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

View our latest analysis for Jiangxi Welgao Electronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Jiangxi Welgao Electronics' past further, check out this free graph covering Jiangxi Welgao Electronics' past earnings, revenue and cash flow.

What Can We Tell From Jiangxi Welgao Electronics' ROCE Trend?

On the surface, the trend of ROCE at Jiangxi Welgao Electronics doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jiangxi Welgao Electronics has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. 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 Jiangxi Welgao Electronics' ROCE

To conclude, we've found that Jiangxi Welgao Electronics is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Jiangxi Welgao Electronics has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Jiangxi Welgao Electronics 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.