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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Guangzhou Jiacheng International LogisticsLtd (SHSE:603535) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Guangzhou Jiacheng International LogisticsLtd, this is the formula:

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

0.064 = CN¥237m ÷ (CN¥4.6b - CN¥942m) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Jiacheng International LogisticsLtd has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.5% average generated by the Logistics industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Jiacheng International LogisticsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangzhou Jiacheng International LogisticsLtd.

So How Is Guangzhou Jiacheng International LogisticsLtd's ROCE Trending?

There are better returns on capital out there than what we're seeing at Guangzhou Jiacheng International LogisticsLtd. Over the past five years, ROCE has remained relatively flat at around 6.4% and the business has deployed 129% 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.

Our Take On Guangzhou Jiacheng International LogisticsLtd's ROCE

In conclusion, Guangzhou Jiacheng International LogisticsLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 50% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 2 warning signs for Guangzhou Jiacheng International LogisticsLtd (1 makes us a bit uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.