What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Wuxi Online Offline Communication Information Technology (SZSE:300959) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Wuxi Online Offline Communication Information Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = CN¥23m ÷ (CN¥1.3b - CN¥156m) (Based on the trailing twelve months to September 2023).
Thus, Wuxi Online Offline Communication Information Technology has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi Online Offline Communication Information Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Wuxi Online Offline Communication Information Technology.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Wuxi Online Offline Communication Information Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.9% from 38% five years ago. 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.
Our Take On Wuxi Online Offline Communication Information Technology's ROCE
In summary, Wuxi Online Offline Communication Information Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 66% in the last three years. Therefore based on the analysis done in this article, we don't think Wuxi Online Offline Communication Information Technology has the makings of a multi-bagger.
If you want to know some of the risks facing Wuxi Online Offline Communication Information Technology we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.
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.