Guangdong Lyric Robot AutomationLtd (SHSE:688499) Will Be Hoping To Turn Its Returns On Capital Around

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. Although, when we looked at Guangdong Lyric Robot AutomationLtd (SHSE:688499), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Guangdong Lyric Robot AutomationLtd is:

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

0.011 = CN¥50m ÷ (CN¥11b - CN¥6.0b) (Based on the trailing twelve months to September 2023).

So, Guangdong Lyric Robot AutomationLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.0%.

View our latest analysis for Guangdong Lyric Robot AutomationLtd

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're interested in investigating Guangdong Lyric Robot AutomationLtd's past further, check out this free graph covering Guangdong Lyric Robot AutomationLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 866%. Usually this isn't ideal, but given Guangdong Lyric Robot AutomationLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Guangdong Lyric Robot AutomationLtd's earnings and if they change as a result from the capital raise.

On a side note, Guangdong Lyric Robot AutomationLtd's current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Guangdong Lyric Robot AutomationLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangdong Lyric Robot AutomationLtd. Despite these promising trends, the stock has collapsed 72% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we found 4 warning signs for Guangdong Lyric Robot AutomationLtd (3 are potentially serious) 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.