Slowing Rates Of Return At Guangdong Mingyang ElectricLtd (SZSE:301291) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Guangdong Mingyang ElectricLtd (SZSE:301291) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Guangdong Mingyang ElectricLtd is:

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

0.14 = CN¥601m ÷ (CN¥7.8b - CN¥3.5b) (Based on the trailing twelve months to March 2024).

So, Guangdong Mingyang ElectricLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Electrical industry.

Check out our latest analysis for Guangdong Mingyang ElectricLtd

In the above chart we have measured Guangdong Mingyang ElectricLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Mingyang ElectricLtd .

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 5,262% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Guangdong Mingyang ElectricLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 44% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 44%, some of that risk is still prevalent.

The Bottom Line

In the end, Guangdong Mingyang ElectricLtd has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Guangdong Mingyang ElectricLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

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