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. In light of that, when we looked at Guangdong Champion Asia ElectronicsLtd (SHSE:603386) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guangdong Champion Asia ElectronicsLtd, this is the formula:

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

0.071 = CN¥136m ÷ (CN¥3.6b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

So, Guangdong Champion Asia ElectronicsLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Champion Asia ElectronicsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Champion Asia ElectronicsLtd.

What Can We Tell From Guangdong Champion Asia ElectronicsLtd's ROCE Trend?

When we looked at the ROCE trend at Guangdong Champion Asia ElectronicsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 13% 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, Guangdong Champion Asia ElectronicsLtd's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Guangdong Champion Asia ElectronicsLtd's ROCE

In summary, Guangdong Champion Asia ElectronicsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Guangdong Champion Asia ElectronicsLtd has the makings of a multi-bagger.

Guangdong Champion Asia ElectronicsLtd does have some risks though, and we've spotted 3 warning signs for Guangdong Champion Asia ElectronicsLtd that you might be interested in.

While Guangdong Champion Asia ElectronicsLtd 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.

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