Returns On Capital At Guangdong Tecsun Science & TechnologyLtd (SZSE:002908) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangdong Tecsun Science & TechnologyLtd:

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

0.098 = CN¥116m ÷ (CN¥1.5b - CN¥303m) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Tecsun Science & TechnologyLtd has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

See 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're interested in investigating Guangdong Tecsun Science & TechnologyLtd's past further, check out this free graph covering Guangdong Tecsun Science & TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Guangdong Tecsun Science & TechnologyLtd. Over the past five years, ROCE has remained relatively flat at around 9.8% and the business has deployed 88% more capital into its operations. 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.

The Key Takeaway

In conclusion, Guangdong Tecsun Science & TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Guangdong Tecsun Science & TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

While Guangdong Tecsun Science & TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.