Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Guangzhou Tech-Long Packaging MachineryLtd, this is the formula:

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

0.043 = CN¥33m ÷ (CN¥2.1b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Tech-Long Packaging MachineryLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

See our latest analysis for Guangzhou Tech-Long Packaging MachineryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Guangzhou Tech-Long Packaging MachineryLtd has performed in the past in other metrics, you can view this free graph of Guangzhou Tech-Long Packaging MachineryLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangzhou Tech-Long Packaging MachineryLtd Tell Us?

We're delighted to see that Guangzhou Tech-Long Packaging MachineryLtd is reaping rewards from its investments and has now broken into profitability. The company now earns 4.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Guangzhou Tech-Long Packaging MachineryLtd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 64% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Guangzhou Tech-Long Packaging MachineryLtd's ROCE

To bring it all together, Guangzhou Tech-Long Packaging MachineryLtd has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for Guangzhou Tech-Long Packaging MachineryLtd that we think you should be aware of.

While Guangzhou Tech-Long Packaging MachineryLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com