There Are Reasons To Feel Uneasy About Bear Electric ApplianceLtd's (SZSE:002959) Returns On Capital

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. 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. Although, when we looked at Bear Electric ApplianceLtd (SZSE:002959), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Bear Electric ApplianceLtd, this is the formula:

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

0.11 = CN¥349m ÷ (CN¥5.0b - CN¥1.8b) (Based on the trailing twelve months to June 2024).

So, Bear Electric ApplianceLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Consumer Durables industry.

Check out our latest analysis for Bear Electric ApplianceLtd

Above you can see how the current ROCE for Bear Electric ApplianceLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Bear Electric ApplianceLtd .

What Does the ROCE Trend For Bear Electric ApplianceLtd Tell Us?

On the surface, the trend of ROCE at Bear Electric ApplianceLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 26% 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.

In Conclusion...

To conclude, we've found that Bear Electric ApplianceLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last five years. Therefore based on the analysis done in this article, we don't think Bear Electric ApplianceLtd has the makings of a multi-bagger.

If you'd like to know more about Bear Electric ApplianceLtd, we've spotted 2 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.