There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Camelot Electronics TechnologyLtd (SZSE:301282) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Camelot Electronics TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥53m ÷ (CN¥2.6b - CN¥844m) (Based on the trailing twelve months to September 2023).
Therefore, Camelot Electronics TechnologyLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.
See our latest analysis for Camelot Electronics TechnologyLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Camelot Electronics TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Camelot Electronics TechnologyLtd, check out these free graphs here.
What Does the ROCE Trend For Camelot Electronics TechnologyLtd Tell Us?
When we looked at the ROCE trend at Camelot Electronics TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 3.1%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
On a side note, Camelot Electronics TechnologyLtd has done well to pay down its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Camelot Electronics TechnologyLtd's ROCE
In summary, we're somewhat concerned by Camelot Electronics TechnologyLtd's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
On a final note, we found 4 warning signs for Camelot Electronics TechnologyLtd (2 make us uncomfortable) 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.
