Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Guangzhou Haoyang ElectronicLtd (SZSE:300833) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guangzhou Haoyang ElectronicLtd, this is the formula:

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

0.14 = CN¥332m ÷ (CN¥2.6b - CN¥193m) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Haoyang ElectronicLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

In the above chart we have measured Guangzhou Haoyang ElectronicLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Haoyang ElectronicLtd .

What Can We Tell From Guangzhou Haoyang ElectronicLtd's ROCE Trend?

When we looked at the ROCE trend at Guangzhou Haoyang ElectronicLtd, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Guangzhou Haoyang ElectronicLtd's ROCE

To conclude, we've found that Guangzhou Haoyang ElectronicLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Guangzhou Haoyang ElectronicLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Guangzhou Haoyang ElectronicLtd 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.