What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Guangdong Shunkong DevelopmentLtd (SZSE:003039) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guangdong Shunkong DevelopmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥423m ÷ (CN¥4.8b - CN¥993m) (Based on the trailing twelve months to September 2023).
Thus, Guangdong Shunkong DevelopmentLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 7.0% it's much better.
See our latest analysis for Guangdong Shunkong DevelopmentLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Shunkong DevelopmentLtd's ROCE against it's prior returns. If you'd like to look at how Guangdong Shunkong DevelopmentLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 52% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Guangdong Shunkong DevelopmentLtd has done well to reduce current liabilities to 21% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Key Takeaway
The main thing to remember is that Guangdong Shunkong DevelopmentLtd has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we've spotted 1 warning sign facing Guangdong Shunkong DevelopmentLtd that you might find interesting.
While Guangdong Shunkong DevelopmentLtd 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.
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.
