Guangdong Shunna Electric (SZSE:000533) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Guangdong Shunna Electric (SZSE:000533) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guangdong Shunna Electric is:

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

0.11 = CN¥120m ÷ (CN¥2.6b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Shunna Electric has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.4% it's much better.

Check out our latest analysis for Guangdong Shunna Electric

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'd like to look at how Guangdong Shunna Electric has performed in the past in other metrics, you can view this free graph of Guangdong Shunna Electric's past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that Guangdong Shunna Electric is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 47% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Guangdong Shunna Electric could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Guangdong Shunna Electric's ROCE

In the end, Guangdong Shunna Electric has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Guangdong Shunna Electric looks impressive, no company is worth an infinite price. The intrinsic value infographic for 000533 helps visualize whether it is currently trading for a fair price.

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.