If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Sichuan Zhongguang Lightning Protection Technologies (SZSE:300414) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Sichuan Zhongguang Lightning Protection Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥30m ÷ (CN¥1.2b - CN¥203m) (Based on the trailing twelve months to September 2023).
So, Sichuan Zhongguang Lightning Protection Technologies has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Zhongguang Lightning Protection Technologies' ROCE against it's prior returns. If you're interested in investigating Sichuan Zhongguang Lightning Protection Technologies' past further, check out this free graph covering Sichuan Zhongguang Lightning Protection Technologies' past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Sichuan Zhongguang Lightning Protection Technologies' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 3.0% and the business has deployed 21% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Sichuan Zhongguang Lightning Protection Technologies' ROCE
Long story short, while Sichuan Zhongguang Lightning Protection Technologies has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a final note, we found 2 warning signs for Sichuan Zhongguang Lightning Protection Technologies (1 is a bit concerning) you should be aware of.
While Sichuan Zhongguang Lightning Protection 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.