Genbyte Technology (SZSE:003028) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Genbyte Technology (SZSE:003028), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Genbyte Technology is:

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

0.10 = CN¥177m ÷ (CN¥2.4b - CN¥640m) (Based on the trailing twelve months to September 2024).

Therefore, Genbyte Technology has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Electrical industry.

Check out our latest analysis for Genbyte Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genbyte Technology's ROCE against it's prior returns. If you're interested in investigating Genbyte Technology's past further, check out this free graph covering Genbyte Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Genbyte Technology, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 10%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Genbyte Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Genbyte Technology. However, despite the promising trends, the stock has fallen 19% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Genbyte Technology (at least 1 which is significant) , and understanding them would certainly be useful.

While Genbyte Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.