Returns At Caihong Display DevicesLtd (SHSE:600707) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Caihong Display DevicesLtd (SHSE:600707) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Caihong Display DevicesLtd, this is the formula:

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

0.044 = CN¥1.4b ÷ (CN¥41b - CN¥9.5b) (Based on the trailing twelve months to September 2024).

So, Caihong Display DevicesLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.7%.

See our latest analysis for Caihong Display DevicesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Caihong Display DevicesLtd's ROCE against it's prior returns. If you'd like to look at how Caihong Display DevicesLtd has performed in the past in other metrics, you can view this free graph of Caihong Display DevicesLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Caihong Display DevicesLtd Tell Us?

We're delighted to see that Caihong Display DevicesLtd is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.4% on its capital. While returns have increased, the amount of capital employed by Caihong Display DevicesLtd has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To sum it up, Caihong Display DevicesLtd is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 99% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Caihong Display DevicesLtd that you might find interesting.

While Caihong Display DevicesLtd 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.