If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Guangzhou Great Power Energy and Technology (SZSE:300438) 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 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. To calculate this metric for Guangzhou Great Power Energy and Technology, this is the formula:

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

0.069 = CN¥592m ÷ (CN¥16b - CN¥7.4b) (Based on the trailing twelve months to September 2023).

So, Guangzhou Great Power Energy and Technology has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.5% average generated by the Electrical industry.

See our latest analysis for Guangzhou Great Power Energy and Technology

Above you can see how the current ROCE for Guangzhou Great Power Energy and Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Guangzhou Great Power Energy and Technology's ROCE Trending?

We weren't thrilled with the trend because Guangzhou Great Power Energy and Technology's ROCE has reduced by 55% over the last five years, while the business employed 273% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangzhou Great Power Energy and Technology might not have received a full period of earnings contribution from it. Additionally, we found that Guangzhou Great Power Energy and Technology's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a separate but related note, it's important to know that Guangzhou Great Power Energy and Technology has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To conclude, we've found that Guangzhou Great Power Energy and Technology is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 198% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Guangzhou Great Power Energy and Technology (of which 1 doesn't sit too well with us!) that you should know about.

While Guangzhou Great Power Energy and 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.