Be Wary Of Guangzhou Great Power Energy and Technology (SZSE:300438) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Guangzhou Great Power Energy and Technology (SZSE:300438), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Guangzhou Great Power Energy and Technology:

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

0.016 = CN¥136m ÷ (CN¥16b - CN¥7.6b) (Based on the trailing twelve months to March 2024).

Thus, Guangzhou Great Power Energy and Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

See our latest analysis for Guangzhou Great Power Energy and Technology

Above you can see how the current ROCE for Guangzhou Great Power Energy and Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Great Power Energy and Technology .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 7.8% five years ago, while capital employed has grown 218%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Guangzhou Great Power Energy and Technology's earnings and if they change as a result from the capital raise.

Another thing to note, Guangzhou Great Power Energy and Technology has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Guangzhou Great Power Energy and Technology's ROCE

We're a bit apprehensive about Guangzhou Great Power Energy and Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 110% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Guangzhou Great Power Energy and Technology, we've spotted 2 warning signs, and 1 of them is potentially serious.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.