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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Guoguang ElectricLtd.Chengdu (SHSE:688776) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Guoguang ElectricLtd.Chengdu is:

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

0.038 = CN¥76m ÷ (CN¥2.4b - CN¥410m) (Based on the trailing twelve months to March 2024).

Thus, Guoguang ElectricLtd.Chengdu has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guoguang ElectricLtd.Chengdu'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 Guoguang ElectricLtd.Chengdu.

How Are Returns Trending?

In terms of Guoguang ElectricLtd.Chengdu's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.8% for the last five years, and the capital employed within the business has risen 216% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, Guoguang ElectricLtd.Chengdu's returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Guoguang ElectricLtd.Chengdu could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688776 on our platform quite valuable.

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.