Guangzhou Shiyuan Electronic Technology (SZSE:002841) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Guangzhou Shiyuan Electronic Technology (SZSE:002841) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Guangzhou Shiyuan Electronic Technology is:

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

0.074 = CN¥1.0b ÷ (CN¥23b - CN¥9.2b) (Based on the trailing twelve months to December 2024).

Thus, Guangzhou Shiyuan Electronic Technology has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

View our latest analysis for Guangzhou Shiyuan Electronic Technology

Above you can see how the current ROCE for Guangzhou Shiyuan Electronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Shiyuan Electronic Technology .

What Does the ROCE Trend For Guangzhou Shiyuan Electronic Technology Tell Us?

When we looked at the ROCE trend at Guangzhou Shiyuan Electronic Technology, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 7.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Guangzhou Shiyuan Electronic Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangzhou Shiyuan Electronic Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 52% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Guangzhou Shiyuan Electronic Technology that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.