GuangZhou Wahlap Technology's (SZSE:301011) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, the ROCE of GuangZhou Wahlap Technology (SZSE:301011) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. Analysts use this formula to calculate it for GuangZhou Wahlap Technology:

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

0.14 = CN¥109m ÷ (CN¥1.2b - CN¥430m) (Based on the trailing twelve months to June 2024).

Therefore, GuangZhou Wahlap Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Leisure industry average of 6.7% it's much better.

See our latest analysis for GuangZhou Wahlap Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangZhou Wahlap Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GuangZhou Wahlap Technology.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 90% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that GuangZhou Wahlap Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From GuangZhou Wahlap Technology's ROCE

The main thing to remember is that GuangZhou Wahlap Technology has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 45% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

GuangZhou Wahlap Technology does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While GuangZhou Wahlap Technology 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.