What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Chaozhou Three-Circle (Group)Ltd (SZSE:300408) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 Chaozhou Three-Circle (Group)Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = CN¥1.8b ÷ (CN¥23b - CN¥2.4b) (Based on the trailing twelve months to September 2024).
Therefore, Chaozhou Three-Circle (Group)Ltd has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.
Above you can see how the current ROCE for Chaozhou Three-Circle (Group)Ltd 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 Chaozhou Three-Circle (Group)Ltd .
The Trend Of ROCE
When we looked at the ROCE trend at Chaozhou Three-Circle (Group)Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.9% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Chaozhou Three-Circle (Group)Ltd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 97% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 1 warning sign with Chaozhou Three-Circle (Group)Ltd and understanding it should be part of your investment process.
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.
