What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Haoyang ElectronicLtd (SZSE:300833), it didn't seem to tick all of these boxes.

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 Haoyang ElectronicLtd, this is the formula:

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

0.15 = CN¥373m ÷ (CN¥2.7b - CN¥223m) (Based on the trailing twelve months to March 2024).

Thus, Guangzhou Haoyang ElectronicLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

Above you can see how the current ROCE for Guangzhou Haoyang ElectronicLtd 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 analyst report for Guangzhou Haoyang ElectronicLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Guangzhou Haoyang ElectronicLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 30% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Guangzhou Haoyang ElectronicLtd has done well to pay down its current liabilities to 8.3% 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. 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.

Our Take On Guangzhou Haoyang ElectronicLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangzhou Haoyang ElectronicLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 48% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Guangzhou Haoyang ElectronicLtd we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

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