Guangdong Construction Engineering Group's (SZSE:002060) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangdong Construction Engineering Group:

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

0.067 = CN¥2.6b ÷ (CN¥131b - CN¥92b) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Construction Engineering Group has an ROCE of 6.7%. On its own, that's a low figure but it's around the 5.7% average generated by the Construction industry.

View 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're interested, you can view the analysts predictions in our free analyst report for Guangdong Construction Engineering Group .

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

In terms of Guangdong Construction Engineering Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 246% 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.

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 than6.7% because total capital employed would be higher.The 6.7% 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. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

In Conclusion...

In conclusion, Guangdong Construction Engineering Group has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Guangdong Construction Engineering Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Guangdong Construction Engineering Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.