Returns On Capital At Guandian Defense TechnologyLtd (SHSE:688287) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guandian Defense TechnologyLtd (SHSE:688287) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Guandian Defense TechnologyLtd, this is the formula:

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

0.085 = CN¥86m ÷ (CN¥1.1b - CN¥63m) (Based on the trailing twelve months to March 2024).

So, Guandian Defense TechnologyLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 4.3% generated by the Aerospace & Defense industry, it's much better.

Check out our latest analysis for Guandian Defense TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guandian Defense TechnologyLtd'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 Guandian Defense TechnologyLtd.

What Does the ROCE Trend For Guandian Defense TechnologyLtd Tell Us?

There are better returns on capital out there than what we're seeing at Guandian Defense TechnologyLtd. The company has consistently earned 8.5% for the last five years, and the capital employed within the business has risen 250% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Guandian Defense TechnologyLtd's ROCE

As we've seen above, Guandian Defense TechnologyLtd's returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guandian Defense TechnologyLtd (of which 1 is significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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