Greatoo Intelligent Equipment (SZSE:002031) Has Some Difficulty Using Its Capital Effectively

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Greatoo Intelligent Equipment (SZSE:002031) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Greatoo Intelligent Equipment is:

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

0.0012 = CN¥3.5m ÷ (CN¥4.4b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

So, Greatoo Intelligent Equipment has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.3%.

Check out our latest analysis for Greatoo Intelligent Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Greatoo Intelligent Equipment's ROCE against it's prior returns. If you're interested in investigating Greatoo Intelligent Equipment's past further, check out this free graph covering Greatoo Intelligent Equipment's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Greatoo Intelligent Equipment's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.1% we see today. On top of that, the business is utilizing 22% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

In summary, it's unfortunate that Greatoo Intelligent Equipment is shrinking its capital base and also generating lower returns. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 44% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Greatoo Intelligent Equipment, we've discovered 2 warning signs that you should be aware of.

While Greatoo Intelligent Equipment 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.