Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101) May Have Issues Allocating Its Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.

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

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 Hongtu Technology (holdings)Ltd, this is the formula:

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

0.04 = CN¥353m ÷ (CN¥14b - CN¥4.8b) (Based on the trailing twelve months to September 2024).

So, Guangdong Hongtu Technology (holdings)Ltd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for Guangdong Hongtu Technology (holdings)Ltd

In the above chart we have measured Guangdong Hongtu Technology (holdings)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Hongtu Technology (holdings)Ltd .

How Are Returns Trending?

When we looked at the ROCE trend at Guangdong Hongtu Technology (holdings)Ltd, we didn't gain much confidence. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 4.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Guangdong Hongtu Technology (holdings)Ltd's ROCE

While returns have fallen for Guangdong Hongtu Technology (holdings)Ltd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 110% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Guangdong Hongtu Technology (holdings)Ltd you'll probably want to know about.

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.