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. 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 Wuhu Fuchun Dye and WeaveLtd (SHSE:605189) 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 Wuhu Fuchun Dye and WeaveLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥77m ÷ (CN¥3.7b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
So, Wuhu Fuchun Dye and WeaveLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.1%.
Above you can see how the current ROCE for Wuhu Fuchun Dye and WeaveLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wuhu Fuchun Dye and WeaveLtd.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Wuhu Fuchun Dye and WeaveLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 16% five years ago. However it looks like Wuhu Fuchun Dye and WeaveLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Wuhu Fuchun Dye and WeaveLtd's ROCE
To conclude, we've found that Wuhu Fuchun Dye and WeaveLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Wuhu Fuchun Dye and WeaveLtd has the makings of a multi-bagger.
Wuhu Fuchun Dye and WeaveLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...
While Wuhu Fuchun Dye and WeaveLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.