If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Guangzhou Great Power Energy and Technology (SZSE:300438), it didn't seem to tick all of these boxes.

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. 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)

0.016 = CN¥136m ÷ (CN¥16b - CN¥7.6b) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Great Power Energy and Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

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'd like, you can check out the forecasts from the analysts covering Guangzhou Great Power Energy and Technology for free.

What Can We Tell From Guangzhou Great Power Energy and Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 7.8% five years ago, while the business's capital employed increased by 218%. Usually this isn't ideal, but given Guangzhou Great Power Energy and Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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.

On a side note, Guangzhou Great Power Energy and Technology's current liabilities are still rather high at 48% of total assets. 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.

Our Take On Guangzhou Great Power Energy and Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guangzhou Great Power Energy and Technology have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 86% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 1 warning sign for Guangzhou Great Power Energy and Technology that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com