Guangzhou Haoyang ElectronicLtd (SZSE:300833) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangzhou Haoyang ElectronicLtd (SZSE:300833), it didn't seem to tick all of these boxes.

What Is 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 Guangzhou Haoyang ElectronicLtd, this is the formula:

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

0.14 = CN¥329m ÷ (CN¥2.6b - CN¥193m) (Based on the trailing twelve months to September 2024).

Therefore, Guangzhou Haoyang ElectronicLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.8% it's much better.

See our latest analysis for Guangzhou Haoyang ElectronicLtd

Above you can see how the current ROCE for Guangzhou Haoyang ElectronicLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Haoyang ElectronicLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Guangzhou Haoyang ElectronicLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Guangzhou Haoyang ElectronicLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Guangzhou Haoyang ElectronicLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Guangzhou Haoyang ElectronicLtd 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.