The Returns At Gotion High-techLtd (SZSE:002074) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Gotion High-techLtd (SZSE:002074) and its ROCE trend, we weren't exactly thrilled.

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

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 Gotion High-techLtd, this is the formula:

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

0.025 = CN¥1.3b ÷ (CN¥103b - CN¥52b) (Based on the trailing twelve months to September 2024).

So, Gotion High-techLtd has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for Gotion High-techLtd

Above you can see how the current ROCE for Gotion High-techLtd 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 Gotion High-techLtd .

The Trend Of ROCE

In terms of Gotion High-techLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 314% in that time. 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.

On a side note, Gotion High-techLtd's current liabilities are still rather high at 50% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

As we've seen above, Gotion High-techLtd's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 24% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Gotion High-techLtd does have some risks though, and we've spotted 2 warning signs for Gotion High-techLtd that you might be interested in.

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.