If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think WCON Electronics (Guangdong) (SZSE:301328) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. 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)
0.044 = CN¥86m ÷ (CN¥2.0b - CN¥86m) (Based on the trailing twelve months to September 2023).
Thus, WCON Electronics (Guangdong) has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.0%.
See our latest analysis for WCON Electronics (Guangdong)
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'd like, you can check out the forecasts from the analysts covering WCON Electronics (Guangdong) here for free.
The Trend Of ROCE
In terms of WCON Electronics (Guangdong)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 4.3% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line 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. Although the market must be expecting these trends to improve because the stock has gained 29% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One final note, you should learn about the 3 warning signs we've spotted with WCON Electronics (Guangdong) (including 1 which is potentially serious) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
