The Returns On Capital At Chengdu Xuguang Electronics (SHSE:600353) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Chengdu Xuguang Electronics (SHSE:600353), it didn't seem to tick all of these boxes.

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 Chengdu Xuguang Electronics:

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

0.05 = CN¥109m ÷ (CN¥3.2b - CN¥968m) (Based on the trailing twelve months to September 2024).

Therefore, Chengdu Xuguang Electronics has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

Check out our latest analysis for Chengdu Xuguang Electronics

Above you can see how the current ROCE for Chengdu Xuguang Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chengdu Xuguang Electronics .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Chengdu Xuguang Electronics, we didn't gain much confidence. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 5.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Chengdu Xuguang Electronics' ROCE

While returns have fallen for Chengdu Xuguang Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 127% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing Chengdu Xuguang Electronics that you might find interesting.

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.