Here's What's Concerning About Chaozhou Three-Circle (Group)Ltd's (SZSE:300408) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Chaozhou Three-Circle (Group)Ltd (SZSE:300408), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Chaozhou Three-Circle (Group)Ltd, this is the formula:

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

0.073 = CN¥1.5b ÷ (CN¥23b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

Therefore, Chaozhou Three-Circle (Group)Ltd has an ROCE of 7.3%. 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.

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

Above you can see how the current ROCE for Chaozhou Three-Circle (Group)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chaozhou Three-Circle (Group)Ltd .

So How Is Chaozhou Three-Circle (Group)Ltd's ROCE Trending?

When we looked at the ROCE trend at Chaozhou Three-Circle (Group)Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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.

The Bottom Line

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. And long term investors must be optimistic going forward because the stock has returned a huge 105% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 2 warning signs facing Chaozhou Three-Circle (Group)Ltd that you might find interesting.

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.

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.