Guangdong Leadyo IC Testing's (SHSE:688135) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Guangdong Leadyo IC Testing (SHSE:688135) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Guangdong Leadyo IC Testing:

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

0.006 = CN¥9.9m ÷ (CN¥2.0b - CN¥393m) (Based on the trailing twelve months to December 2023).

Therefore, Guangdong Leadyo IC Testing has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.3%.

View our latest analysis for Guangdong Leadyo IC Testing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Leadyo IC Testing's ROCE against it's prior returns. If you're interested in investigating Guangdong Leadyo IC Testing's past further, check out this free graph covering Guangdong Leadyo IC Testing's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Guangdong Leadyo IC Testing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.8% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Guangdong Leadyo IC Testing in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guangdong Leadyo IC Testing (of which 1 is potentially serious!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.