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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Guangdong Rifeng Electric Cable (SZSE:002953) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Guangdong Rifeng Electric Cable is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CN¥135m ÷ (CN¥2.8b - CN¥913m) (Based on the trailing twelve months to September 2022).
Therefore, Guangdong Rifeng Electric Cable has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.5%.
Check out our latest analysis for Guangdong Rifeng Electric CableSZSE:002953 Return on Capital Employed December 15th 2022
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Rifeng Electric Cable's ROCE against it's prior returns. If you're interested in investigating Guangdong Rifeng Electric Cable's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Guangdong Rifeng Electric Cable's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 7.3% from 14% three years ago. 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.
On a side note, Guangdong Rifeng Electric Cable's current liabilities have increased over the last three years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Guangdong Rifeng Electric Cable's ROCE
While returns have fallen for Guangdong Rifeng Electric Cable in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 10.0% 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 2 warning signs facing Guangdong Rifeng Electric Cable 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.