Guangdong Dongpeng HoldingsLtd (SZSE:003012) Is Reinvesting At Lower Rates Of Return

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Guangdong Dongpeng HoldingsLtd (SZSE:003012) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong Dongpeng HoldingsLtd is:

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

0.066 = CN¥517m ÷ (CN¥11b - CN¥3.5b) (Based on the trailing twelve months to June 2024).

Thus, Guangdong Dongpeng HoldingsLtd has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Building industry average of 7.6%.

Check out our latest analysis for Guangdong Dongpeng HoldingsLtd

Above you can see how the current ROCE for Guangdong Dongpeng HoldingsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Dongpeng HoldingsLtd for free.

So How Is Guangdong Dongpeng HoldingsLtd's ROCE Trending?

On the surface, the trend of ROCE at Guangdong Dongpeng HoldingsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Guangdong Dongpeng HoldingsLtd has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Guangdong Dongpeng HoldingsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Dongpeng HoldingsLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 50% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.