Investors Could Be Concerned With Guangdong Lvtong New Energy Electric Vehicle Technology's (SZSE:301322) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Guangdong Lvtong New Energy Electric Vehicle Technology (SZSE:301322) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 Guangdong Lvtong New Energy Electric Vehicle Technology is:

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

0.048 = CN¥135m ÷ (CN¥3.0b - CN¥196m) (Based on the trailing twelve months to September 2024).

Thus, Guangdong Lvtong New Energy Electric Vehicle Technology has an ROCE of 4.8%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 2.6%.

See our latest analysis for Guangdong Lvtong New Energy Electric Vehicle Technology

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

The Trend Of ROCE

In terms of Guangdong Lvtong New Energy Electric Vehicle Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Guangdong Lvtong New Energy Electric Vehicle Technology has decreased its current liabilities to 6.5% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Lvtong New Energy Electric Vehicle Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guangdong Lvtong New Energy Electric Vehicle Technology have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 12% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Guangdong Lvtong New Energy Electric Vehicle Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

While Guangdong Lvtong New Energy Electric Vehicle Technology 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.