Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Long Young Electronic (Kunshan) (SZSE:301389), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Long Young Electronic (Kunshan):

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

0.031 = CN¥68m ÷ (CN¥2.3b - CN¥60m) (Based on the trailing twelve months to September 2023).

So, Long Young Electronic (Kunshan) has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.0%.

See our latest analysis for Long Young Electronic (Kunshan)

In the above chart we have measured Long Young Electronic (Kunshan)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 34% four years ago, while capital employed has grown 586%. That being said, Long Young Electronic (Kunshan) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Long Young Electronic (Kunshan) might not have received a full period of earnings contribution from it.

In Conclusion...

We're a bit apprehensive about Long Young Electronic (Kunshan) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Long Young Electronic (Kunshan) does come with some risks, and we've found 2 warning signs that you should be aware of.

While Long Young Electronic (Kunshan) 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.