Chongqing YuXin Pingrui Electronic (SZSE:301107) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Chongqing YuXin Pingrui Electronic (SZSE:301107) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Chongqing YuXin Pingrui Electronic:

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

0.034 = CN¥32m ÷ (CN¥1.2b - CN¥230m) (Based on the trailing twelve months to September 2024).

So, Chongqing YuXin Pingrui Electronic has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Chongqing YuXin Pingrui Electronic

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 Chongqing YuXin Pingrui Electronic has performed in the past in other metrics, you can view this free graph of Chongqing YuXin Pingrui Electronic's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Chongqing YuXin Pingrui Electronic's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.4% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Chongqing YuXin Pingrui Electronic's ROCE

Bringing it all together, while we're somewhat encouraged by Chongqing YuXin Pingrui Electronic's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 42% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Chongqing YuXin Pingrui Electronic, we've discovered 1 warning sign that you should be aware of.

While Chongqing YuXin Pingrui Electronic 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.