Guizhou Taiyong-Changzheng TechnologyLtd (SZSE:002927) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Guizhou Taiyong-Changzheng TechnologyLtd (SZSE:002927) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Guizhou Taiyong-Changzheng TechnologyLtd, this is the formula:

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

0.028 = CN¥32m ÷ (CN¥1.8b - CN¥682m) (Based on the trailing twelve months to September 2024).

Therefore, Guizhou Taiyong-Changzheng TechnologyLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

View our latest analysis for Guizhou Taiyong-Changzheng TechnologyLtd

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 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.

The Trend Of ROCE

When we looked at the ROCE trend at Guizhou Taiyong-Changzheng TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 9.6% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. 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.

In Conclusion...

In summary, we're somewhat concerned by Guizhou Taiyong-Changzheng TechnologyLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 22% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Guizhou Taiyong-Changzheng TechnologyLtd (of which 1 shouldn't be ignored!) that you should know about.

While Guizhou Taiyong-Changzheng TechnologyLtd 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.