What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Guangzhou Goaland Energy Conservation Tech (SZSE:300499) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Guangzhou Goaland Energy Conservation Tech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥157m ÷ (CN¥2.5b - CN¥1.0b) (Based on the trailing twelve months to March 2022).
Therefore, Guangzhou Goaland Energy Conservation Tech has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.5% it's much better.
View our latest analysis for Guangzhou Goaland Energy Conservation Tech
SZSE:300499 Return on Capital Employed August 25th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Goaland Energy Conservation Tech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guangzhou Goaland Energy Conservation Tech, check out these free graphs here.
The Trend Of ROCE
The trends we've noticed at Guangzhou Goaland Energy Conservation Tech are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 133%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a separate but related note, it's important to know that Guangzhou Goaland Energy Conservation Tech has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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.
The Bottom Line
In summary, it's great to see that Guangzhou Goaland Energy Conservation Tech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we've found 2 warning signs for Guangzhou Goaland Energy Conservation Tech that we think you should be aware of.
While Guangzhou Goaland Energy Conservation Tech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.