Returns At Lingyi iTech (Guangdong) (SZSE:002600) Appear To Be Weighed Down

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Lingyi iTech (Guangdong) (SZSE:002600), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Lingyi iTech (Guangdong), this is the formula:

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

0.086 = CN¥2.3b ÷ (CN¥42b - CN¥15b) (Based on the trailing twelve months to September 2024).

So, Lingyi iTech (Guangdong) has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Electronic industry, it's much better.

See our latest analysis for Lingyi iTech (Guangdong)

Above you can see how the current ROCE for Lingyi iTech (Guangdong) 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 Lingyi iTech (Guangdong) for free.

What Can We Tell From Lingyi iTech (Guangdong)'s ROCE Trend?

In terms of Lingyi iTech (Guangdong)'s historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 89% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 35% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Long story short, while Lingyi iTech (Guangdong) has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 2.6% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 1 warning sign with Lingyi iTech (Guangdong) and understanding it should be part of your investment process.

While Lingyi iTech (Guangdong) 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.