Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Wuxi Smart Auto-Control Engineering (SZSE:002877) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Smart Auto-Control Engineering, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = CN¥146m ÷ (CN¥2.4b - CN¥897m) (Based on the trailing twelve months to September 2023).
Thus, Wuxi Smart Auto-Control Engineering has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 6.1% generated by the Machinery industry, it's much better.
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 Smart Auto-Control Engineering has performed in the past in other metrics, you can view this free graph of Wuxi Smart Auto-Control Engineering's past earnings, revenue and cash flow.
What Does the ROCE Trend For Wuxi Smart Auto-Control Engineering Tell Us?
In terms of Wuxi Smart Auto-Control Engineering's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 142% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
In conclusion, Wuxi Smart Auto-Control Engineering has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know more about Wuxi Smart Auto-Control Engineering, we've spotted 3 warning signs, and 1 of them is significant.
While Wuxi Smart Auto-Control Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.