What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 WCON Electronics (Guangdong) (SZSE:301328) 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. Analysts use this formula to calculate it for WCON Electronics (Guangdong):

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

0.041 = CN¥78m ÷ (CN¥2.0b - CN¥81m) (Based on the trailing twelve months to September 2024).

Therefore, WCON Electronics (Guangdong) has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

In the above chart we have measured WCON Electronics (Guangdong)'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 analyst report for WCON Electronics (Guangdong) .

So How Is WCON Electronics (Guangdong)'s ROCE Trending?

When we looked at the ROCE trend at WCON Electronics (Guangdong), we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. However it looks like WCON Electronics (Guangdong) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, WCON Electronics (Guangdong) has done well to pay down its current liabilities to 4.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On WCON Electronics (Guangdong)'s ROCE

In summary, WCON Electronics (Guangdong) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for WCON Electronics (Guangdong) (of which 1 shouldn't be ignored!) that you should know about.

While WCON Electronics (Guangdong) 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.