What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Wuxi Commercial Mansion Grand Orient (SHSE:600327) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Wuxi Commercial Mansion Grand Orient is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = CN¥105m ÷ (CN¥5.9b - CN¥1.8b) (Based on the trailing twelve months to September 2023).
Therefore, Wuxi Commercial Mansion Grand Orient has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 5.4%.
See our latest analysis for Wuxi Commercial Mansion Grand Orient
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'd like to look at how Wuxi Commercial Mansion Grand Orient has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Wuxi Commercial Mansion Grand Orient Tell Us?
When we looked at the ROCE trend at Wuxi Commercial Mansion Grand Orient, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Wuxi Commercial Mansion Grand Orient's ROCE
To conclude, we've found that Wuxi Commercial Mansion Grand Orient is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 108% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know about the risks facing Wuxi Commercial Mansion Grand Orient, we've discovered 3 warning signs that 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.