Guizhou Taiyong-Changzheng TechnologyLtd (SZSE:002927) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Guizhou Taiyong-Changzheng TechnologyLtd (SZSE:002927) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Guizhou Taiyong-Changzheng TechnologyLtd:

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

0.071 = CN¥79m ÷ (CN¥1.6b - CN¥487m) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou Taiyong-Changzheng TechnologyLtd has an ROCE of 7.1%. On its own, that's a low figure but it's around the 6.3% average generated by the Electrical industry.

Check out our latest analysis for Guizhou Taiyong-Changzheng TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guizhou Taiyong-Changzheng TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Guizhou Taiyong-Changzheng TechnologyLtd has performed in the past in other metrics, you can view this free graph of Guizhou Taiyong-Changzheng TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guizhou Taiyong-Changzheng TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Guizhou Taiyong-Changzheng TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. 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.

On a side note, Guizhou Taiyong-Changzheng TechnologyLtd's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Guizhou Taiyong-Changzheng TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guizhou Taiyong-Changzheng TechnologyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 42% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Guizhou Taiyong-Changzheng TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

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.