Xiamen Guang Pu Electronics (SZSE:300632) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Xiamen Guang Pu Electronics (SZSE:300632), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Xiamen Guang Pu Electronics:

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

0.0048 = CN¥9.5m ÷ (CN¥2.5b - CN¥531m) (Based on the trailing twelve months to March 2024).

Thus, Xiamen Guang Pu Electronics has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

See our latest analysis for Xiamen Guang Pu Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiamen Guang Pu Electronics' ROCE against it's prior returns. If you'd like to look at how Xiamen Guang Pu Electronics has performed in the past in other metrics, you can view this free graph of Xiamen Guang Pu Electronics' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Xiamen Guang Pu Electronics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.5% from 23% five years ago. 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.

On a related note, Xiamen Guang Pu Electronics has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Xiamen Guang Pu Electronics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xiamen Guang Pu Electronics is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 4 warning signs we've spotted with Xiamen Guang Pu Electronics (including 1 which shouldn't be ignored) .

While Xiamen Guang Pu Electronics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com