Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) looks decent, right now, so lets see what the trend of returns can tell us.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guangdong Xinbao Electrical Appliances Holdings is:

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

0.16 = CN¥1.3b ÷ (CN¥14b - CN¥5.8b) (Based on the trailing twelve months to March 2024).

So, Guangdong Xinbao Electrical Appliances Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Consumer Durables industry.

See our latest analysis for Guangdong Xinbao Electrical Appliances Holdings

In the above chart we have measured Guangdong Xinbao Electrical Appliances Holdings' 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 Xinbao Electrical Appliances Holdings .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 104% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Guangdong Xinbao Electrical Appliances Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Guangdong Xinbao Electrical Appliances Holdings' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Guangdong Xinbao Electrical Appliances Holdings' ROCE

To sum it up, Guangdong Xinbao Electrical Appliances Holdings has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Guangdong Xinbao Electrical Appliances Holdings and understanding it should be part of your investment process.

While Guangdong Xinbao Electrical Appliances Holdings 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.