Guangzhou KDT MachineryLtd (SZSE:002833) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangzhou KDT MachineryLtd (SZSE:002833), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangzhou KDT MachineryLtd:

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

0.17 = CN¥606m ÷ (CN¥4.2b - CN¥605m) (Based on the trailing twelve months to September 2023).

Thus, Guangzhou KDT MachineryLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Machinery industry.

Check out our latest analysis for Guangzhou KDT MachineryLtd

Above you can see how the current ROCE for Guangzhou KDT MachineryLtd 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 Guangzhou KDT MachineryLtd .

What Does the ROCE Trend For Guangzhou KDT MachineryLtd Tell Us?

On the surface, the trend of ROCE at Guangzhou KDT MachineryLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 24% five years ago. 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.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Guangzhou KDT MachineryLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 82% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Guangzhou KDT MachineryLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Guangzhou KDT 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.