Here's What's Concerning About Guobo Electronics' (SHSE:688375) 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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guobo Electronics (SHSE:688375), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guobo Electronics:

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

0.095 = CN¥572m ÷ (CN¥9.0b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Guobo Electronics has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.3% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for Guobo Electronics

Above you can see how the current ROCE for Guobo Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guobo Electronics for free.

What The Trend Of ROCE Can Tell Us

In terms of Guobo Electronics' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 16%, but since then they've fallen to 9.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Guobo Electronics' ROCE

To conclude, we've found that Guobo Electronics is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Guobo Electronics (including 1 which doesn't sit too well with us) .

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.