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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Guomai Technologies (SZSE:002093) so let's look a bit deeper.

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. The formula for this calculation on Guomai Technologies is:

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

0.024 = CN¥94m ÷ (CN¥4.4b - CN¥469m) (Based on the trailing twelve months to March 2024).

Therefore, Guomai Technologies has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.9%.

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're interested in investigating Guomai Technologies' past further, check out this free graph covering Guomai Technologies' past earnings, revenue and cash flow.

What Can We Tell From Guomai Technologies' ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Guomai Technologies promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 193% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Guomai Technologies' ROCE

In summary, we're delighted to see that Guomai Technologies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Guomai Technologies and understanding them should be part of your investment process.

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.