Capital Allocation Trends At Chaozhou Three-Circle (Group)Ltd (SZSE:300408) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Chaozhou Three-Circle (Group)Ltd (SZSE:300408), we don't think it's current trends fit the mold of a multi-bagger.

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 Chaozhou Three-Circle (Group)Ltd is:

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

0.066 = CN¥1.3b ÷ (CN¥22b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

So, Chaozhou Three-Circle (Group)Ltd has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.3%.

See our latest analysis for Chaozhou Three-Circle (Group)Ltd

In the above chart we have measured Chaozhou Three-Circle (Group)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chaozhou Three-Circle (Group)Ltd .

The Trend Of ROCE

When we looked at the ROCE trend at Chaozhou Three-Circle (Group)Ltd, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 6.6%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Chaozhou Three-Circle (Group)Ltd'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 Chaozhou Three-Circle (Group)Ltd. Furthermore the stock has climbed 59% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 2 warning signs for Chaozhou Three-Circle (Group)Ltd 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.