What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Guangzhou Shiyuan Electronic Technology (SZSE:002841) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Shiyuan Electronic Technology, this is the formula:

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

0.086 = CN¥1.2b ÷ (CN¥22b - CN¥8.9b) (Based on the trailing twelve months to September 2023).

So, Guangzhou Shiyuan Electronic Technology has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.1% generated by the Electronic industry, it's much better.

See our latest analysis for Guangzhou Shiyuan Electronic Technology

Above you can see how the current ROCE for Guangzhou Shiyuan Electronic Technology 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 report for Guangzhou Shiyuan Electronic Technology.

The Trend Of ROCE

When we looked at the ROCE trend at Guangzhou Shiyuan Electronic Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.6% from 33% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Guangzhou Shiyuan Electronic Technology has done well to pay down its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Guangzhou Shiyuan Electronic Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last five years. Therefore based on the analysis done in this article, we don't think Guangzhou Shiyuan Electronic Technology has the makings of a multi-bagger.

If you want to know some of the risks facing Guangzhou Shiyuan Electronic Technology we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Guangzhou Shiyuan Electronic 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.