Returns At Guoguang ElectricLtd.Chengdu (SHSE:688776) Appear To Be Weighed Down

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Guoguang ElectricLtd.Chengdu (SHSE:688776), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guoguang ElectricLtd.Chengdu:

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).

Therefore, Guoguang ElectricLtd.Chengdu has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

See our latest analysis for Guoguang ElectricLtd.Chengdu

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'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 Can We Tell From Guoguang ElectricLtd.Chengdu's ROCE Trend?

There are better returns on capital out there than what we're seeing at Guoguang ElectricLtd.Chengdu. 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. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In conclusion, Guoguang ElectricLtd.Chengdu has been investing more capital into the business, but returns on that capital haven't increased. And in the last year, the stock has given away 40% 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.