Guangzhou Risong Intelligent Technology Holding (SHSE:688090) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Guangzhou Risong Intelligent Technology Holding (SHSE:688090), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Guangzhou Risong Intelligent Technology Holding, this is the formula:

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

0.057 = CN¥54m ÷ (CN¥1.6b - CN¥624m) (Based on the trailing twelve months to December 2023).

Thus, Guangzhou Risong Intelligent Technology Holding has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

Check out our latest analysis for Guangzhou Risong Intelligent Technology Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Guangzhou Risong Intelligent Technology Holding has performed in the past in other metrics, you can view this free graph of Guangzhou Risong Intelligent Technology Holding's past earnings, revenue and cash flow.

What Can We Tell From Guangzhou Risong Intelligent Technology Holding's ROCE Trend?

In terms of Guangzhou Risong Intelligent Technology Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.7% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Guangzhou Risong Intelligent Technology Holding's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 42% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Guangzhou Risong Intelligent Technology Holding you'll probably want to know about.

While Guangzhou Risong Intelligent Technology Holding 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.