Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangdong Lyric Robot Automation (SHSE:688499), it didn't seem to tick all of these boxes.
What Is 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. To calculate this metric for Guangdong Lyric Robot Automation, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥105m ÷ (CN¥9.8b - CN¥5.4b) (Based on the trailing twelve months to March 2023).
So, Guangdong Lyric Robot Automation has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.5%.
See our latest analysis for Guangdong Lyric Robot Automation
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 Lyric Robot Automation has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 25% five years ago, while the business's capital employed increased by 1,479%. That being said, Guangdong Lyric Robot Automation raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Guangdong Lyric Robot Automation probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Guangdong Lyric Robot Automation has done well to pay down its current liabilities to 55% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
Our Take On Guangdong Lyric Robot Automation's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangdong Lyric Robot Automation. And there could be an opportunity here if other metrics look good too, because the stock has declined 70% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Guangdong Lyric Robot Automation does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...
While Guangdong Lyric Robot Automation 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.