Returns At Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) Appear To Be Weighed Down

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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?

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. 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)

0.15 = CN¥1.3b ÷ (CN¥15b - CN¥6.9b) (Based on the trailing twelve months to September 2024).

So, Guangdong Xinbao Electrical Appliances Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Consumer Durables industry.

View 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're interested, you can view the analysts predictions in our free analyst report for Guangdong Xinbao Electrical Appliances Holdings .

What Does the ROCE Trend For Guangdong Xinbao Electrical Appliances Holdings Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 97% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

On a separate but related note, it's important to know that Guangdong Xinbao Electrical Appliances Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, Guangdong Xinbao Electrical Appliances Holdings has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 3.1% return to shareholders who held over that period. So to determine if Guangdong Xinbao Electrical Appliances Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, Guangdong Xinbao Electrical Appliances Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Guangdong Xinbao Electrical Appliances Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.