Guangdong Construction Engineering Group (SZSE:002060) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Guangdong Construction Engineering Group (SZSE:002060) and its ROCE trend, we weren't exactly thrilled.

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 Guangdong Construction Engineering Group, this is the formula:

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

0.063 = CN¥2.4b ÷ (CN¥132b - CN¥93b) (Based on the trailing twelve months to September 2024).

So, Guangdong Construction Engineering Group has an ROCE of 6.3%. 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 Guangdong Construction Engineering Group

Above you can see how the current ROCE for Guangdong Construction Engineering Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Construction Engineering Group .

What Does the ROCE Trend For Guangdong Construction Engineering Group Tell Us?

There are better returns on capital out there than what we're seeing at Guangdong Construction Engineering Group. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 229% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 71% of total assets, this reported ROCE would probably be less than6.3% because total capital employed would be higher.The 6.3% ROCE could be even lower if current liabilities weren't 71% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Guangdong Construction Engineering Group's ROCE

Long story short, while Guangdong Construction Engineering Group has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Guangdong Construction Engineering Group (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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.