We Like These Underlying Return On Capital Trends At Gold cup Electric ApparatusLtd (SZSE:002533)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Gold cup Electric ApparatusLtd's (SZSE:002533) returns on capital, so let's have a look.

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. To calculate this metric for Gold cup Electric ApparatusLtd, this is the formula:

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

0.13 = CN¥698m ÷ (CN¥10b - CN¥5.0b) (Based on the trailing twelve months to September 2024).

So, Gold cup Electric ApparatusLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

View our latest analysis for Gold cup Electric ApparatusLtd

Above you can see how the current ROCE for Gold cup Electric ApparatusLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Gold cup Electric ApparatusLtd .

The Trend Of ROCE

Investors would be pleased with what's happening at Gold cup Electric ApparatusLtd. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 88%. So we're very much inspired by what we're seeing at Gold cup Electric ApparatusLtd thanks to its ability to profitably reinvest capital.

Another thing to note, Gold cup Electric ApparatusLtd has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Gold cup Electric ApparatusLtd's ROCE

In summary, it's great to see that Gold cup Electric ApparatusLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 147% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Gold cup Electric ApparatusLtd that you might find interesting.

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.