Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Guangdong Hongtu Technology (holdings)Ltd:

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

0.056 = CN¥474m ÷ (CN¥12b - CN¥3.7b) (Based on the trailing twelve months to December 2023).

Thus, Guangdong Hongtu Technology (holdings)Ltd has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

Check out our latest analysis for Guangdong Hongtu Technology (holdings)Ltd

Above you can see how the current ROCE for Guangdong Hongtu Technology (holdings)Ltd 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 Hongtu Technology (holdings)Ltd .

What Can We Tell From Guangdong Hongtu Technology (holdings)Ltd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 62%. That being said, Guangdong Hongtu Technology (holdings)Ltd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangdong Hongtu Technology (holdings)Ltd might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Hongtu Technology (holdings)Ltd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 51% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 1 warning sign with Guangdong Hongtu Technology (holdings)Ltd and understanding this should be part of your investment process.

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.