Guangdong Tecsun Science & TechnologyLtd (SZSE:002908) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Guangdong Tecsun Science & TechnologyLtd (SZSE:002908), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Tecsun Science & TechnologyLtd is:

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

0.041 = CN¥48m ÷ (CN¥1.4b - CN¥253m) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Tecsun Science & TechnologyLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Guangdong Tecsun Science & TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Tecsun Science & TechnologyLtd.

What Does the ROCE Trend For Guangdong Tecsun Science & TechnologyLtd Tell Us?

When we looked at the ROCE trend at Guangdong Tecsun Science & TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Guangdong Tecsun Science & TechnologyLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 40% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching Guangdong Tecsun Science & TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Guangdong Tecsun Science & 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.