Guangzhou Haozhi IndustrialLtd (SZSE:300503) Will Want To Turn Around Its Return Trends

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 briefly looking over the numbers, we don't think Guangzhou Haozhi IndustrialLtd (SZSE:300503) 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 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. The formula for this calculation on Guangzhou Haozhi IndustrialLtd is:

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

0.019 = CN¥32m ÷ (CN¥2.6b - CN¥930m) (Based on the trailing twelve months to June 2024).

So, Guangzhou Haozhi IndustrialLtd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

View our latest analysis for Guangzhou Haozhi IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Haozhi IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Guangzhou Haozhi IndustrialLtd's past further, check out this free graph covering Guangzhou Haozhi IndustrialLtd's past earnings, revenue and cash flow.

What Can We Tell From Guangzhou Haozhi IndustrialLtd's ROCE Trend?

When we looked at the ROCE trend at Guangzhou Haozhi IndustrialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 1.9%. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Guangzhou Haozhi IndustrialLtd'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 Guangzhou Haozhi IndustrialLtd. And the stock has followed suit returning a meaningful 79% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 2 warning signs with Guangzhou Haozhi IndustrialLtd and understanding them should be part of your investment process.

While Guangzhou Haozhi IndustrialLtd 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.

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.

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