Guangzhou Haoyang ElectronicLtd's (SZSE:300833) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at Guangzhou Haoyang ElectronicLtd (SZSE:300833) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Guangzhou Haoyang ElectronicLtd is:

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

0.15 = CN¥356m ÷ (CN¥2.6b - CN¥214m) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Haoyang ElectronicLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Electrical industry.

Check out our latest analysis for Guangzhou Haoyang ElectronicLtd

Above you can see how the current ROCE for Guangzhou Haoyang ElectronicLtd 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 Guangzhou Haoyang ElectronicLtd .

So How Is Guangzhou Haoyang ElectronicLtd's ROCE Trending?

On the surface, the trend of ROCE at Guangzhou Haoyang ElectronicLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 30% over the last five years. However it looks like Guangzhou Haoyang ElectronicLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Guangzhou Haoyang ElectronicLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 9.8% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Guangzhou Haoyang ElectronicLtd, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Guangzhou Haoyang ElectronicLtd 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.