If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Wuxi Acryl Technology (SHSE:603722), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Wuxi Acryl Technology is:

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

0.07 = CN¥53m ÷ (CN¥935m - CN¥174m) (Based on the trailing twelve months to June 2023).

So, Wuxi Acryl Technology has an ROCE of 7.0%. On its own, that's a low figure but it's around the 5.9% average generated by the Chemicals industry.

See our latest analysis for Wuxi Acryl Technology

In the above chart we have measured Wuxi Acryl Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Wuxi Acryl Technology's ROCE Trending?

On the surface, the trend of ROCE at Wuxi Acryl Technology doesn't inspire confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 7.0%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Wuxi Acryl Technology have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 66% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Wuxi Acryl Technology does have some risks though, and we've spotted 1 warning sign for Wuxi Acryl 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.

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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.