Some Investors May Be Worried About Guangdong Champion Asia ElectronicsLtd's (SHSE:603386) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Guangdong Champion Asia ElectronicsLtd (SHSE:603386) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong Champion Asia ElectronicsLtd is:

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

0.014 = CN¥27m ÷ (CN¥3.4b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

So, Guangdong Champion Asia ElectronicsLtd has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

View our latest analysis for Guangdong Champion Asia ElectronicsLtd

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

What Can We Tell From Guangdong Champion Asia ElectronicsLtd's ROCE Trend?

In terms of Guangdong Champion Asia ElectronicsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Guangdong Champion Asia ElectronicsLtd has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Guangdong Champion Asia ElectronicsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Champion Asia ElectronicsLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Guangdong Champion Asia ElectronicsLtd, we've spotted 4 warning signs, and 2 of them are a bit concerning.

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.

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