The Returns On Capital At Guoguang ElectricLtd.Chengdu (SHSE:688776) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Guoguang ElectricLtd.Chengdu (SHSE:688776) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.026 = CN¥51m ÷ (CN¥2.4b - CN¥430m) (Based on the trailing twelve months to December 2024).

Therefore, Guoguang ElectricLtd.Chengdu has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

View 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'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 The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Guoguang ElectricLtd.Chengdu, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. 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.

The Bottom Line On Guoguang ElectricLtd.Chengdu's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guoguang ElectricLtd.Chengdu have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 16% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guoguang ElectricLtd.Chengdu (of which 1 doesn't sit too well with us!) that you should know about.

While Guoguang ElectricLtd.Chengdu isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.