The Return Trends At Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) Look Promising

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) so let's look a bit deeper.

Understanding 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 Guangzhou Tech-Long Packaging MachineryLtd:

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

0.034 = CN¥28m ÷ (CN¥2.5b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

So, Guangzhou Tech-Long Packaging MachineryLtd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for Guangzhou Tech-Long Packaging MachineryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Tech-Long Packaging MachineryLtd's ROCE against it's prior returns. If you're interested in investigating Guangzhou Tech-Long Packaging MachineryLtd's past further, check out this free graph covering Guangzhou Tech-Long Packaging MachineryLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Guangzhou Tech-Long Packaging MachineryLtd has broken into profitability. The company now earns 3.4% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

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 67% 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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Guangzhou Tech-Long Packaging MachineryLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002209 helps visualize whether it is currently trading for a fair price.

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.