There are a few key trends to look for if we want to identify the next multi-bagger. 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 Guoguang ElectricLtd.Chengdu (SHSE:688776) 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)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guoguang ElectricLtd.Chengdu, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥58m ÷ (CN¥2.4b - CN¥430m) (Based on the trailing twelve months to September 2024).
So, Guoguang ElectricLtd.Chengdu has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Guoguang ElectricLtd.Chengdu's past further, check out this free graph covering Guoguang ElectricLtd.Chengdu's past earnings, revenue and cash flow.
What Does the ROCE Trend For Guoguang ElectricLtd.Chengdu Tell Us?
When we looked at the ROCE trend at Guoguang ElectricLtd.Chengdu, we didn't gain much confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 2.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
Our Take On Guoguang ElectricLtd.Chengdu's ROCE
We're a bit apprehensive about Guoguang ElectricLtd.Chengdu because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to continue researching Guoguang ElectricLtd.Chengdu, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Guoguang ElectricLtd.Chengdu 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.
