Here's What's Concerning About Guangdong Ellington Electronics TechnologyLtd's (SHSE:603328) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Guangdong Ellington Electronics TechnologyLtd (SHSE:603328), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Guangdong Ellington Electronics TechnologyLtd is:

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

0.088 = CN¥339m ÷ (CN¥5.0b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

So, Guangdong Ellington Electronics TechnologyLtd has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

View our latest analysis for Guangdong Ellington Electronics TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Ellington Electronics TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Ellington Electronics TechnologyLtd.

So How Is Guangdong Ellington Electronics TechnologyLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Guangdong Ellington Electronics TechnologyLtd. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangdong Ellington Electronics TechnologyLtd becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Guangdong Ellington Electronics TechnologyLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Guangdong Ellington Electronics TechnologyLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Guangdong Ellington Electronics TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.