What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Guangzhou Kingteller TechnologyLtd's (SZSE:002177) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Guangzhou Kingteller TechnologyLtd, this is the formula:

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

0.00056 = CN¥959k ÷ (CN¥1.8b - CN¥57m) (Based on the trailing twelve months to September 2022).

So, Guangzhou Kingteller TechnologyLtd has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Tech industry average of 6.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Kingteller TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Guangzhou Kingteller TechnologyLtd has performed in the past in other metrics, you can view this free graph of Guangzhou Kingteller TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangzhou Kingteller TechnologyLtd Tell Us?

We're delighted to see that Guangzhou Kingteller TechnologyLtd is reaping rewards from its investments and has now broken into profitability. The company now earns 0.06% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Guangzhou Kingteller TechnologyLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, Guangzhou Kingteller TechnologyLtd has decreased current liabilities to 3.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Guangzhou Kingteller TechnologyLtd's ROCE

To bring it all together, Guangzhou Kingteller TechnologyLtd has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Guangzhou Kingteller TechnologyLtd we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.