If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Guangdong Champion Asia ElectronicsLtd (SHSE:603386), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guangdong Champion Asia ElectronicsLtd, this is the formula:

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

0.089 = CN¥156m ÷ (CN¥3.4b - CN¥1.7b) (Based on the trailing twelve months to June 2022).

Thus, Guangdong Champion Asia ElectronicsLtd has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Electronic industry average of 7.9%.

View our latest analysis for Guangdong Champion Asia ElectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Champion Asia ElectronicsLtd's ROCE against it's prior returns. If you're interested in investigating Guangdong Champion Asia ElectronicsLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Guangdong Champion Asia ElectronicsLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 14% five years ago, while the business's capital employed increased by 242%. Usually this isn't ideal, but given Guangdong Champion Asia ElectronicsLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangdong Champion Asia ElectronicsLtd might not have received a full period of earnings contribution from it.

On a side note, Guangdong Champion Asia ElectronicsLtd's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangdong Champion Asia ElectronicsLtd. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 3 warning signs facing Guangdong Champion Asia ElectronicsLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.