There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Guoguang ElectricLtd.Chengdu (SHSE:688776) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Guoguang ElectricLtd.Chengdu:

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

0.045 = CN¥86m ÷ (CN¥2.3b - CN¥376m) (Based on the trailing twelve months to September 2023).

Thus, Guoguang ElectricLtd.Chengdu has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

Above you can see how the current ROCE for Guoguang ElectricLtd.Chengdu 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 Guoguang ElectricLtd.Chengdu .

The Trend Of ROCE

When we looked at the ROCE trend at Guoguang ElectricLtd.Chengdu, we didn't gain much confidence. Around four years ago the returns on capital were 7.9%, but since then they've fallen to 4.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Guoguang ElectricLtd.Chengdu because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 48% over the last year, 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.

One more thing, we've spotted 2 warning signs facing Guoguang ElectricLtd.Chengdu that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.