If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Wangsu Science & TechnologyLtd (SZSE:300017), the trends above didn't look too great.
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 Wangsu Science & TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = CN¥317m ÷ (CN¥11b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Thus, Wangsu Science & TechnologyLtd has an ROCE of 3.3%. On its own, that's a low figure but it's around the 4.0% average generated by the IT industry.
Above you can see how the current ROCE for Wangsu Science & TechnologyLtd 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 analyst report for Wangsu Science & TechnologyLtd .
What Does the ROCE Trend For Wangsu Science & TechnologyLtd Tell Us?
There is reason to be cautious about Wangsu Science & TechnologyLtd, given the returns are trending downwards. About five years ago, returns on capital were 7.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Wangsu Science & TechnologyLtd to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Wangsu Science & TechnologyLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
While Wangsu Science & TechnologyLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 300017 on our platform.
While Wangsu Science & TechnologyLtd 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.