Investors Could Be Concerned With Guangzhou Shiyuan Electronic Technology's (SZSE:002841) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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.

What Is 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. Analysts use this formula to calculate it for Guangzhou Shiyuan Electronic Technology:

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

0.072 = CN¥986m ÷ (CN¥23b - CN¥9.5b) (Based on the trailing twelve months to June 2024).

Therefore, Guangzhou Shiyuan Electronic Technology has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

See our latest analysis for Guangzhou Shiyuan Electronic Technology

In the above chart we have measured Guangzhou Shiyuan Electronic Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Shiyuan Electronic Technology for free.

What The Trend Of ROCE Can Tell Us

In terms of Guangzhou Shiyuan Electronic Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.2% from 25% five years ago. However it looks like Guangzhou Shiyuan Electronic Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Guangzhou Shiyuan Electronic Technology has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Guangzhou Shiyuan Electronic Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Guangzhou Shiyuan Electronic Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Guangzhou Shiyuan Electronic Technology has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Guangzhou Shiyuan Electronic Technology (including 1 which can't be ignored) .

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.

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

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.