Guoguang ElectricLtd.Chengdu (SHSE:688776) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Guoguang ElectricLtd.Chengdu (SHSE:688776) and its ROCE trend, we weren't exactly thrilled.

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 Guoguang ElectricLtd.Chengdu, this is the formula:

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

0.025 = CN¥50m ÷ (CN¥2.4b - CN¥430m) (Based on the trailing twelve months to September 2024).

Thus, Guoguang ElectricLtd.Chengdu has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

Check out our latest analysis for Guoguang ElectricLtd.Chengdu

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guoguang ElectricLtd.Chengdu.

The Trend Of ROCE

On the surface, the trend of ROCE at Guoguang ElectricLtd.Chengdu doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 7.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Guoguang ElectricLtd.Chengdu's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 59% 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 know some of the risks facing Guoguang ElectricLtd.Chengdu we've found 3 warning signs (1 is significant!) 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.