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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guangdong AVCiT Technology Holding (SZSE:001229), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for Guangdong AVCiT Technology Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥78m ÷ (CN¥1.0b - CN¥64m) (Based on the trailing twelve months to September 2023).
Thus, Guangdong AVCiT Technology Holding has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong AVCiT Technology Holding's ROCE against it's prior returns. If you're interested in investigating Guangdong AVCiT Technology Holding's past further, check out this free graph covering Guangdong AVCiT Technology Holding's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Guangdong AVCiT Technology Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 46% over the last four years. However it looks like Guangdong AVCiT Technology Holding 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.
On a related note, Guangdong AVCiT Technology Holding has decreased its current liabilities to 6.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Guangdong AVCiT Technology Holding's ROCE
To conclude, we've found that Guangdong AVCiT Technology Holding is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Guangdong AVCiT Technology Holding has the makings of a multi-bagger.
On a separate note, we've found 2 warning signs for Guangdong AVCiT Technology Holding you'll probably want to know about.
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.