Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating GuangZhou Wahlap Technology (SZSE:301011), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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 GuangZhou Wahlap Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥39m ÷ (CN¥1.2b - CN¥394m) (Based on the trailing twelve months to September 2023).
Thus, GuangZhou Wahlap Technology has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Leisure industry average of 6.5%.
View our latest analysis for GuangZhou Wahlap Technology
SZSE:301011 Return on Capital Employed December 27th 2023
Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangZhou Wahlap Technology's ROCE against it's prior returns. If you're interested in investigating GuangZhou Wahlap Technology's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 147%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence GuangZhou Wahlap Technology might not have received a full period of earnings contribution from it.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by GuangZhou Wahlap Technology's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
GuangZhou Wahlap Technology does have some risks though, and we've spotted 1 warning sign for GuangZhou Wahlap Technology that you might be interested in.
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.
