Guangdong Lingxiao Pump IndustryLtd (SZSE:002884) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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, the ROCE of Guangdong Lingxiao Pump IndustryLtd (SZSE:002884) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for Guangdong Lingxiao Pump IndustryLtd, this is the formula:

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

0.17 = CN¥372m ÷ (CN¥2.3b - CN¥103m) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Lingxiao Pump IndustryLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Machinery industry.

See our latest analysis for Guangdong Lingxiao Pump IndustryLtd

In the above chart we have measured Guangdong Lingxiao Pump IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangdong Lingxiao Pump IndustryLtd for free.

So How Is Guangdong Lingxiao Pump IndustryLtd's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Guangdong Lingxiao Pump IndustryLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Guangdong Lingxiao Pump IndustryLtd's ROCE

In the end, Guangdong Lingxiao Pump IndustryLtd has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 110% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Guangdong Lingxiao Pump IndustryLtd and understanding this should be part of your investment process.

While Guangdong Lingxiao Pump IndustryLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.