If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Guangdong Champion Asia ElectronicsLtd (SHSE:603386) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Guangdong Champion Asia ElectronicsLtd, this is the formula:

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

0.08 = CN¥142m ÷ (CN¥3.5b - CN¥1.7b) (Based on the trailing twelve months to September 2022).

So, Guangdong Champion Asia ElectronicsLtd has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Electronic industry average of 6.9%.

View our latest analysis for Guangdong Champion Asia ElectronicsLtd

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 Guangdong Champion Asia ElectronicsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Guangdong Champion Asia ElectronicsLtd's ROCE Trending?

In terms of Guangdong Champion Asia ElectronicsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guangdong Champion Asia ElectronicsLtd's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Guangdong Champion Asia ElectronicsLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Champion Asia ElectronicsLtd has the makings of a multi-bagger.

Guangdong Champion Asia ElectronicsLtd does have some risks though, and we've spotted 3 warning signs for Guangdong Champion Asia ElectronicsLtd that you might be interested in.

While Guangdong Champion Asia ElectronicsLtd 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.