What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guangdong Construction Engineering Group (SZSE:002060), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangdong Construction Engineering Group:

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

0.07 = CN¥2.6b ÷ (CN¥131b - CN¥94b) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Construction Engineering Group has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Above you can see how the current ROCE for Guangdong Construction Engineering Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Construction Engineering Group for free.

So How Is Guangdong Construction Engineering Group's ROCE Trending?

In terms of Guangdong Construction Engineering Group's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 267% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 72% of total assets, this reported ROCE would probably be less than7.0% because total capital employed would be higher.The 7.0% ROCE could be even lower if current liabilities weren't 72% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

Our Take On Guangdong Construction Engineering Group's ROCE

Long story short, while Guangdong Construction Engineering Group has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 36% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for Guangdong Construction Engineering Group (2 don't sit too well with us) you should be aware of.

While Guangdong Construction Engineering Group 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.

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