Here's What's Concerning About Guangzhou Doppler Electronic Technologies' (SZSE:301528) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Guangzhou Doppler Electronic Technologies (SZSE:301528), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Guangzhou Doppler Electronic Technologies is:

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

0.015 = CN¥23m ÷ (CN¥1.5b - CN¥31m) (Based on the trailing twelve months to June 2024).

So, Guangzhou Doppler Electronic Technologies has an ROCE of 1.5%. 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 Guangzhou Doppler Electronic Technologies

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'd like to look at how Guangzhou Doppler Electronic Technologies has performed in the past in other metrics, you can view this free graph of Guangzhou Doppler Electronic Technologies' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guangzhou Doppler Electronic Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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.

On a side note, Guangzhou Doppler Electronic Technologies has done well to pay down its current liabilities to 2.1% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangzhou Doppler Electronic Technologies' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guangzhou Doppler Electronic Technologies have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last year have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Guangzhou Doppler Electronic Technologies does have some risks though, and we've spotted 2 warning signs for Guangzhou Doppler Electronic Technologies that you might be interested in.

While Guangzhou Doppler Electronic Technologies 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.