There Are Reasons To Feel Uneasy About Chongqing YuXin Pingrui Electronic's (SZSE:301107) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Chongqing YuXin Pingrui Electronic (SZSE:301107), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chongqing YuXin Pingrui Electronic, this is the formula:

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

0.033 = CN¥31m ÷ (CN¥1.2b - CN¥251m) (Based on the trailing twelve months to March 2024).

Thus, Chongqing YuXin Pingrui Electronic has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Chongqing YuXin Pingrui Electronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chongqing YuXin Pingrui Electronic's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Chongqing YuXin Pingrui Electronic.

What Can We Tell From Chongqing YuXin Pingrui Electronic's ROCE Trend?

In terms of Chongqing YuXin Pingrui Electronic's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. 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. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. 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.

Like most companies, Chongqing YuXin Pingrui Electronic does come with some risks, and we've found 2 warning signs 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.