If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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 Guangdong Hongtu Technology (holdings)Ltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥443m ÷ (CN¥12b - CN¥3.7b) (Based on the trailing twelve months to September 2023).
Therefore, Guangdong Hongtu Technology (holdings)Ltd has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.1%.
In the above chart we have measured Guangdong Hongtu Technology (holdings)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Guangdong Hongtu Technology (holdings)Ltd.
What Does the ROCE Trend For Guangdong Hongtu Technology (holdings)Ltd Tell Us?
We weren't thrilled with the trend because Guangdong Hongtu Technology (holdings)Ltd's ROCE has reduced by 50% over the last five years, while the business employed 62% more capital. Usually this isn't ideal, but given Guangdong Hongtu Technology (holdings)Ltd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangdong Hongtu Technology (holdings)Ltd might not have received a full period of earnings contribution from it.
The Bottom Line
To conclude, we've found that Guangdong Hongtu Technology (holdings)Ltd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we've found 1 warning sign for Guangdong Hongtu Technology (holdings)Ltd that we think you should be aware of.
While Guangdong Hongtu Technology (holdings)Ltd 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.
