What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Guangdong High Dream Intellectualized Machinery (SZSE:300720) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Guangdong High Dream Intellectualized Machinery:

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

0.068 = CN¥41m ÷ (CN¥653m - CN¥49m) (Based on the trailing twelve months to March 2024).

So, Guangdong High Dream Intellectualized Machinery has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.3%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Guangdong High Dream Intellectualized Machinery, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.8% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Guangdong High Dream Intellectualized Machinery's ROCE

While returns have fallen for Guangdong High Dream Intellectualized Machinery in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 132% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 3 warning signs with Guangdong High Dream Intellectualized Machinery (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Guangdong High Dream Intellectualized Machinery 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.